The Bank of Japan kept markets guessing on the future of its support for corporate finance, avoiding any reference to the issue in its latest policy review as analysts warily eyed government pressure to keep the measures in place.
The central bank had been tipped to decide whether to stop corporate bond purchases and other measures used to cushion the shock of the financial crisis.
Government ministers have pressed the BOJ to consider the economic fallout of such a move, with some saying it could endanger recovery.
I think the BOJ yielded to the pressure and thought it wasn't the time to send a signal that they will withdraw stimulus, said Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong.
The BOJ left its policy rate unchanged at 0.10 percent as widely expected. It also upgraded its view on the economy, saying it was recovering, but left unchanged its assessment that financial conditions are increasingly showing signs of improvement.
The corporate environment for large firms appears to be improving and the pace of decline in capital spending is slowing, the BOJ said.
Analysts had expected a sign from the Bank of Japan that, like its central bank peers in other major economies, it would start edging monetary policy back toward more normal settings.
The Nikkei business daily reported on October 6 that the BOJ was considering ending its outright buying of commercial paper and corporate bonds at the end of this year and was likely to decide by October 30, the date of its next review.
BOJ Governor Masaaki Shirakawa had signaled an exit to the unconventional steps may be near, telling reporters at a Group of Seven meeting of financial leaders on October 3 that corporate finance was in less need of policy support with credit market conditions improving significantly.
But the central bank has faced pressure from government officials against moving too soon.
Finance Minister Hirohisa Fujii said last week the BOJ should appropriately monitor corporate funding and expressed concerns that the economy was still unstable, though he backtracked later in the week, saying the issue was for the BOJ to decide.
One of his deputies told Reuters in an interview on Wednesday that the government wouldn't request a delay in voting if the Bank of Japan were to decide to end its buying of corporate debt.
For us to ask for a delay in a vote the finance minister and people under him would need to discuss lots of things, but no such thing has happened in advance, said Naoki Minezaki, one of the government's two senior vice finance ministers.
That means the government will leave it up to the BOJ's own judgment.
But analysts said the BOJ's delay in deciding on whether to let its funding support end in December could be a sign of government pressure.
The BOJ might be wanting to end these steps but it likely sees the need to convince (banking minister Shizuka) Kamei and others in the government that credit market conditions have improved enough to do so, said Hirokata Kusaba, senior economist at Mizuho Research Institute in Tokyo.
The BOJ risks conflict with the government if it decides to end them. The chance of the BOJ keeping the steps in place beyond December may have risen somewhat.
MARKETS BACK IN ACTION
Debt issuance has come back to life and credit spreads have shrunk considerably since the BOJ introduced the funding support in the middle of the financial crisis that drove scared investors out of the market.
Corporate debt issuance hit a record high 2.29 trillion yen ($25.5 billion) in June, a sea change from late last year when there were no corporate bond issues for nearly a month.
The cost to insure a basket of Japanese companies' debt with credit default swaps has shrunk to around 115 basis points from its peak of 550 basis points in March.
For a graphic on credit conditions, click on: http://r.reuters.com/sew63f
The rate for new commercial paper has occasionally fallen below that of government debt, raising concerns that its purchase is not so much helping the market as distorting it.
Although Japan's economy crawled out of its recession in the second quarter after a year of sharp contraction, the government is worried about rising unemployment, particularly among small firms that employ about 70 percent of the country's workforce.
(Additional reporting by Stanley White; Editing by Hugh Lawson)