The Bank of Japan on Tuesday held off on new policy steps to combat a stronger yen, saving its limited firepower in case the currency's rise accelerates and threatens the fragile economic recovery.
The finance minister cautioned that excessive currency moves were not good for the economy but did not escalate the level of his recent warnings, while the economics minister said the yen's rise may not continue for a long time.
Governor Masaaki Shirakawa will hold a news conference later on Tuesday, with his comments embargoed until sometime after 4:15 p.m. (3:15 a.m. EDT).
Policymakers in Tokyo fear that a strong yen could derail the feeble recovery from the global crisis. Similarly pressures are mounting on U.S. officials as evidence mounts that growth in the world's biggest economy is faltering.
The U.S. Federal Reserve meets on Tuesday and may send a clear signal it is prepared to print more money to support a faltering economic recovery.
While any steps by the Fed might initially be symbolic, they will still be more forceful than the minor steps preferred by the BOJ and so may drive down the dollar/yen rate, some analysts say.
If the yen firms sharply following the Fed policy announcement later today and the risk of the yen rising toward 80 yen increases, then there is a possibility of the BOJ holding an emergency meeting, said Naoki Iizuka, senior economist at Mizuho Securities.
In that case, the BOJ might increase the amount or extend the duration of its market operations. But even if the BOJ implements such steps, it's questionable how much impact it would have on the currency market.
The dollar is trading within reach of its lowest yen level in 15 years, after Friday's weak U.S. payrolls data heightened expectations the Fed will contemplate further steps to support the economy. It was holding near 85.75 yen on Tuesday.
As widely expected, the BOJ kept interest rates at 0.1 percent in a unanimous vote.
It also kept its economic assessment unchanged and said that the central bank needed to watch how fiscal problems in some European countries could affect the Japanese and global economies.
Both the bond and currency markets showed limited reaction to the BOJ announcement.
Signs of U.S. economic weakness have pushed the dollar down against the yen, clouding the outlook for Japanese growth and pressuring the BOJ to loosen its already very easy monetary policy.
Japan's government maintained its view on Tuesday that the economy is steadily picking up, but a government official warned that recent gains in the yen have been sudden and are undesirable for growth.
Finance Minister Yoshihiko Noda declined to comment on currency levels or intervention in the foreign exchange markets.
Disorderly and excessive currency moves pose a negative impact on the economy and financial stability. I hope to watch markets with utmost caution, he said after a cabinet meeting.
Economics Minister Satoshi Arai told reporters he did not expect the yen to remain on an uptrend for a long time.
The Democratic Party-led government has not piled much pressure on the BOJ for now as the ruling party, weak after losing its parliamentary majority in upper house elections in July, is preoccupied with seeking ways to gain support from other parties in passing legislation.
But that may change in the autumn, when parliament convenes for full-fledged debate on the state budget and the Democrats decide whether to give incumbent Naoto Kan another term in a party leadership vote in September, some analysts say.
Analysts say a yen rise and government pressure were largely behind the BOJ's decision to ease policy in December last year by setting up a facility offering cheap funds to banks.
While the yen has been on an uptrend again, the pace has been slower than late last year, when it gained 2 yen in a single day, allowing the BOJ to justify standing pat this time.
Analysts expect the BOJ to hold off on easing policy unless the yen appears headed for a record high of 79.75 per dollar at a pace matching last November's.
Even if it does act, the BOJ will probably settle for a minor tweak of policy, rather than a radical change such as a return to full-blown quantitative easing. The effect on the yen and the economy would therefore be limited, analysts say.
The BOJ has kept interest rates at 0.1 percent since late 2008. It eased monetary policy last December with the fund-supply tool, which was expanded in March.
The Fed decision is expected around 1815 GMT (2:15 p.m. EDT).
(Editing by Kazunori Takada)