The Bank of Japan left its policy rate target unchanged at 0.5 percent on Friday as uncertainty persists over the nation's economic outlook despite resilient growth figures for the last quarter of 2007.
The rate decision came a day after government data showed the Japanese economy grew at double the expected rate in the last quarter of 2007, but economists and investors expect the BOJ to sit tight for most of the year or even cut rates later this year.
The widely expected decision by the nine-member board was unanimous, which came as little surprise after hawkish board member Atsushi Mizuno dropped his call for a rate rise in December.
The world's second-largest economy grew at an annual clip of 3.7 percent in the last three months of 2007 thanks to strong capital spending and exports, far above the meager 0.6 percent growth recorded in the United States in the same period.
As fears of a U.S. recession linger, Federal Reserve Chairman Ben Bernanke on Thursday held the door open to more interest rate cuts to help the struggling U.S. economy, but said the central bank expects growth to pick up later in the year.
Markets now await a post-meeting news conference by BOJ Governor Toshihiko Fukui for clues on how the central bank views Japan's economic outlook in the face of uncertainty over the global economy.
Yasuhiro Onakado, chief economist at Daiwa SB Investments, said he wanted to look for any changes in Fukui's tone after he sounded a bit dovish last month amid worries about the U.S. economy and financial market turmoil.
"The Federal Reserve cut interest rates and the U.S. government came up with a stimulus package," Onakado said. "I'm interested in whether such moves have changed the BOJ's assessment of the U.S. economy."
For Fukui, it was the second-to-last policy board meeting before his five-year term ends on March 19.
Deputy Governor Toshiro Muto has been seen as the leading candidate to succeed Fukui, though it was unclear if he could win the backing of the main opposition Democratic Party.
Nominations for the governor and two deputies need approval from both chambers of parliament, and this gives the opposition the ability to veto candidates because of its control of the upper house.
The government is expected to propose a replacement for Fukui as early as next week.
No Move Any Time Soon?
The BOJ has kept monetary policy on hold since raising the key overnight call rate target from 0.25 percent a year ago.
Swap contracts on the overnight call rate show that investors see a slight chance of a BOJ rate cut later this year, with the probability of a cut to 0.25 percent by year-end now pegged at about 30 percent, steady from Thursday.
A survey by a government-affiliated institution found on Tuesday that only one economist out of 31 expected a rate cut, while the others saw Japan's rates staying on hold for a while and rising to 0.75 percent towards the end of this year or early next year.
"The BOJ is not in a situation where it could take action immediately, while the G7 meeting last week didn't discuss monetary policy in the way that would prompt a coordinated rate cut by central banks," said Izuru Kato, chief economist at Totan Research.
Finance ministers and central bankers from the Group of Seven rich nations gave a pessimistic economic outlook when they met in Tokyo on Saturday, but there was no talk of joint monetary or fiscal policy action as member countries face different economic challenges.