The Bank of Japan (BoJ) kept its key overnight call rate unchanged at a range of zero to 0.1 percent on Tuesday, assessing that the economic recovery was showing signs of a pause.

BoJ Governor Masaaki Shirakawa said at a press conference that long-term interest rates in Japan and other countries are moving in a correlated fashion and justified the central bank's decision to hold rates. In Japan's case, the extent of gains in long-term rates has been smaller due to the BOJ's commitment to maintain its current monetary policy over a certain timeframe, he said.

Analysts have said though the decision was on expected lines they thought more easing could be on the way. There were no surprises from the Bank of Japan meeting that ended today and policy was unchanged, said Julian Jessop, chief international economist at research firm Capital economics. Nonetheless, we continue to expect further easing later this year to undermine the yen as the global recovery on which the Board's forecasts are so heavily relying ultimately disappoints, he added.

The decision was taken unanimously by the policy board. The main downsides noted by the board were the weakening of both domestic demand and exports, coupled with an employment scene that remained grim.

The GDP forecast for the current fiscal year was predictably revised up from 2.1 percent to 3.3 percent following the strong growth reported in the July-September quarter and revisions to back data, while the forecasts for 2011 and 2012 were revised down slightly.

“Growth prospects will likely be higher for fiscal 2010 mainly due to the revision of past GDP statistics, but remain broadly unchanged for fiscal 2011 and 2012,” the BoJ statement said.

Jessop noted that though Japan’s long-term interest rates are already very low and the credit markets are now working relatively well, a more aggressive policy of QE should at least help to weaken the yen. The prospect of further monetary easing, combined with our concerns about the economic outlook and the growing risk of a fiscal crisis, underpins our forecast that the yen will fall back to 90 against the dollar by end-2011, he wrote in a note.