The Bank of Japan kept markets guessing on Wednesday on the future of its support for corporate finance, avoiding any reference to the measures in a statement after its latest policy review.

The central bank had been tipped to decide whether it would start withdrawing support for corporate finance, despite government criticism that the economy was still unstable.

Although it made no reference to funding measures in its statement, the central bank repeated its assessment that financial conditions were increasingly showing signs of improvement.

It left its policy rate unchanged at 0.10 percent, as a widely expected, and upgraded its view on the economy, saying it was recovering.

The corporate environment for large firms is showing signs of 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.

They had said the central bank might first scrap its buying of commercial paper and corporate bonds from banks and some had speculated it might also end low-interest loans made against corporate debt collateral.

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 (on ending corporate debt buying) 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.

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)