Economic growth has been ``sluggish'' and ``tensions'' in global financial markets have increased, the central bank said in a statement after Governor Masaaki Shirakawa and his six colleagues left the overnight lending rate at 0.5 percent.
The policy board may want more evidence that weakening global growth will derail the world's second-largest economy before deciding whether to cut borrowing costs, already the lowest in the industrialized world. The bank today reiterated that prolonging a low-rate policy could hamper the nation's prospects for sustainable growth in the long term.
The Bank of Japan pumped 3 trillion yen into the banking system today after the overnight call rate surged to 0.65 percent, higher than the bank's 0.5 percent target. Yesterday's 2.5 trillion yen injection was the biggest since March 31.
Global central banks from Frankfurt to Sydney have added more than $200 billion since the beginning of the week to make sure banks keep lending to each other.
Japan's economy will recover after slowing for the time being, the central bank said, adding that it will implement policy flexibly.
Prolonging a low-rate policy may ``lead to swings in economic activity and prices,'' the bank said. Shirakawa made similar remarks in speeches in August and this month.
Japan's economy is on the verge of a recession after shrinking an annualized 3 percent last quarter, the sharpest contraction since 2001. Exports, the main driver of the nation's six-year expansion, fell for the first time in three years.
Since the seven-member board met last month, reports showed inflation accelerated and the ratio of jobs available to applicants fell to the lowest level in four years. Consumer prices excluding fresh food rose 2.4 percent, the fastest rate in a decade, outpacing wage growth.
The central bank said it's watching ``inflation expectations of households and the price-setting behavior of firms in addition to developments in energy and materials prices.''