The Bank of Japan kept monetary policy steady on Tuesday, standing its ground for now in the face of calls from the country's likely next prime minister to pursue unlimited easing to revive an economy widely seen in recession.
The leader of the main opposition, Shinzo Abe, has put the central bank at the centre of economic debate ahead of a Dec. 16 national election that surveys show his party would win, signalling his government would put the bank under much greater pressure to ease policy.
Abe has even suggested revising the Bank of Japan law, a step critics say is aimed at clipping the central bank's independence and forcing it to print money to finance public debt that is already double the size of Japan's economy.
At the end of a two-day meeting, the central bank left monetary policy unchanged, holding fire so it can size up the policies of a new government to be formed after the December vote for the powerful Lower House.
It also wants more time to assess the impact of policy easing in September and October, which raised the size of its asset buying and lending programme to 91 trillion yen ($1.1 trillion) -- roughly equal to Japan's annual state spending.
Markets barely reacted to the announcement as many had priced in the BOJ decision. But some analysts see a good chance the central bank will boost stimulus at its next rate review on Dec. 19-20, just days after the election.
The pressure on the BOJ is so strong that I don't think they can avoid easing next month after the results of the election, said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.
Increasing asset purchases is the most obvious option. Markets will now look to see how BOJ Governor Masaaki Shirakawa responds to the increased political heat and concerns over the central bank's independence when he holds a media briefing later in the day.
Japan's economy shrank 0.9 percent in the September quarter and given headwinds to growth in the current quarter, is widely expected to have slipped into a recession.
The BOJ maintained its assessment that the economy is weakening somewhat but warned that the persistent overseas slowdown was weighing on exports, output and business spending.
It also offered a slightly bleaker view on the outlook, saying the economy will remain weak for the time being before