The Bank of Japan cut its economic forecasts and warned of risks posed by Europe's debt crisis but kept monetary policy steady on Tuesday, counting on spending for reconstruction after last year's earthquake to support a fragile recovery.
The central bank has been keeping a wary eye on developments in Europe as Greece teeters on the edge of default, with some not ruling out a worsening of the crisis that could knock Japan back into recession.
But with the chance of this happening slim for now, the BOJ likely decided to save its limited policy options in case renewed market turmoil or a prolonged slump in overseas growth threaten Japan's return to a moderate recovery.
"Market concern over Europe's debt woes has eased somewhat but uncertainty remains. With the crisis hardly over, the BOJ may ease again around spring depending on developments in Europe, said Yasuo Yamamoto, a senior economist at Mizuho Research Institute in Tokyo.
"Japan's economy is in relatively good shape so the trigger for BOJ action will most likely be a renewed yen spike driven by developments overseas."
As widely expected, the BOJ kept its key policy rate at zero to 0.1 percent and held off on further expanding its 55 trillion yen ($713 billion) asset-buying scheme.
But it warned of risks posed by Europe's debt crisis and cut its economic forecasts for the year ending in March and the following year to reflect the overseas slowdown, signaling its readiness to keep monetary conditions ultra-loose.
BOJ Governor Masaaki Shirakawa will hold an embargoed news conference with his comments expected to come out sometime after 4:15 p.m. (0715 GMT).
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Europe's sovereign debt crisis, the stubbornly strong yen and slowing overseas growth have taken a heavy toll on an export-reliant economy barely emerging from the devastation of the March disaster.
The BOJ cut its assessment on the economy, saying its activity has been "more or less flat." That compared with the previous month's view that the pickup in economic activity has moderated.
But it stuck to its view that after a brief lull the economy will resume a moderate recovery, with post-quake spending and firm private consumption offsetting some of the pain from weak overseas demand.
In a quarterly review of its long-term projections, it cut its economic forecast for the fiscal year ending in March to a 0.4 percent contraction from a 0.3 percent rise that it estimated in October.
It trimmed its forecast for the next fiscal year to an expansion of 2.0 percent from 2.2 percent, reflecting the effects of the global slowdown.
The revisions put the BOJ's forecasts more in line with private-sector forecasts of a slight economic contraction in the year to March and a moderate rebound the next year mainly on spending for reconstruction from the quake.
The BOJ releases its long-term economic and price forecasts in a twice-yearly outlook report in April and October, and reviews them in January and July of each year.
With interest rates virtually at zero, the central bank put in place in 2010 a pool of funds to buy assets ranging from government to public debt to pump cash into the economy and shield it from the pain from a strong yen.
It last boosted the scheme in October last year and has been standing pat since then, but has expressed its readiness to ease again if Europe's debt crisis and the market fallout threaten Japan's recovery prospects. Many market players expect another expansion in its asset purchases by mid-year.
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