The Bank of Japan kept its key policy rate unchanged at 0.25% Thursday, reflecting caution among central bankers and raising questions as to whether the BOJ had bowed to pressure from the government.
The BOJ voted 6-3 in favor of keeping policy unchanged.
The yen fluctuated widely against the U.S. dollar after the decision, first gaining close to a fifth of a cent before slipping to the 120.80 per dollar area where it was just before the news.
The Nikkei 225 Average initially jumped on the news, but has since fallen back slightly. The market is still trading in positive territory.
Japanese media, in the run-up to the meeting, had reported the BOJ was unlikely to raise rates. Prior to those reports, investors had been braced for a tightening.
Tough Decisions
The BOJ has been in a quandary. The economy has been showing an extended recovery but worries remain given soft price pressures and moderate growth in consumption. One senior member of the ruling party this week said the government should formally request a delay in a policy vote.
The BOJ increased its call rate last year for the first time in six years, not long after it ended its ultra-easy policy of flooding the market with excess funds.
Many economists, including those at the BOJ, think the year-on-year rise in Japan's core consumer prices will be limited in the near future.
Some think the inflation rate could briefly slip back to around zero or even below if oil prices continue to fall.
Data last month showed Japanese core consumer prices were 0.2% higher in November from a year earlier. That compared with a 0.1% annual increase in the October data.
Household consumption has also been tepid as wage growth has been soft even though companies are increasingly keen to hire more workers. Slow improvements in consumption and wages have perplexed the BOJ, which has said that strength in the corporate sector should spill over to households.
By avoiding a rate hike, however, the BOJ risked being seen as succumbing to political pressure, some analysts have said. Hidenao Nakagawa, a ruling party heavyweight and a close ally of Prime Minister Shinzo Abe, has said in recent weeks that a premature rate increase
would not only damage the economy but also run counter to the government's policy to boost growth.
Investors are now focusing on a news conference scheduled for later Thursday by BOJ Governor Toshihiko Fukui. Markets will scrutinize Fukui's remarks for signals on future rate policy.
The central bank is also due to release its monthly report, which will include a mid-term review of its twice-yearly economic outlook. In that review, the BOJ is expected to say the economy will keep expanding in the fiscal year starting in April, even though the economy is undershooting the BOJ's forecasts in the near term.