The Bank of Japan kept interest rates unchanged as expected on Wednesday, hours after the U.S. central bank slashed rates by a hefty half-percentage point to try to shield the U.S. economy from a housing slump and market turmoil.
Although the Japanese central bank has been aching to boost Japanese interest rates from current low levels, investors see little chance of an increase for several months in light of growing economic risks -- at home and around the globe.
The BOJ's decision was endorsed by all but one of its nine members, with Atsushi Mizuno, who had called for a rate hike in July and August, again opposing the status quo.
"With lingering fears that U.S. subprime woes could affect the real economy, including that of Japan's, I don't think the BOJ can hike rates any time soon," said Naoki Iizuka, senior economist at Mizuho Securities.
The Fed cut its main policy rate on Tuesday to 4.75% from 5.25% -- the first cut in four years -- saying it needed to forestall adverse effects from troubles in housing sector and financial markets.
Although the Fed's move boosted share prices, market players are concerned that financial markets remain shaky and that more bad news on the U.S. housing sector may be in the offing.
Some bond traders said Mizuno's opposition to keeping rates on hold helped Japanese government bond prices fall further.
The focus is now on Governor Toshihiko Fukui's comments at a news conference starting at 3:30 p.m. Tokyo time.
Swap contracts on the BOJ's overnight call rate and three-month euroyen futures suggest market players see only a limited chance of an increase even by the end of year.
That is a sea change from less than two months ago, when two rate hikes by next March were priced in.
Recent Japanese economic news has not been encouraging for the BOJ. Manufacturers' business confidence slipped to a two-year low, Reuters survey showed on Tuesday, and Japan's economy contracted in the last quarter. As well, Japan's core consumer price index is falling again on an annual basis.
BOJ officials say Japanese economic fundamentals will remain solid and that the central bank has no plans to abandon its aim of gradually tightening credit, after keeping rates near zero for years to combat deflation.
Many at the Bank of Japan have so far stuck to a view that the U.S. economy will have a soft landing, posing only a limited threat to growth in Japan.
The central bank is due to revise its economic forecast in a twice-yearly economic report in October and BOJ officials say at the moment they do not see the need to radically change their forecast of 2.1% growth in the fiscal year to next March.
After more than five years of zero interest rates, the BOJ last year started 'normalizing' Japan's ultra-low interest rates as the bank feels they are disproportionately low in light of steady growth in the economy.