TOKYO (Reuters) – The Bank of Japan kept its policy settings unchanged on Wednesday, saving up its scant ammunition for later, while the yen stabilized in the wake of Switzerland's radical action to curb its soaring currency.
But growing uncertainty over the global outlook and the Swiss move to set a ceiling for its currency against the euro keeps pressure on the Japanese central bank to take further action in coming months to prevent a renewed yen spike from derailing a fragile economic recovery.
Governor Masaaki Shirakawa said the BOJ should be mindful of heightening global economic uncertainty and the potential harm the stubbornly strong yen could have on corporate morale, signaling his readiness to ease policy again to support growth.
But he countered criticism that the BOJ was not doing enough compared with its U.S. and European counterparts, ahead of his visit to France for a weekend Group of Seven gathering where the need for further monetary stimulus may be discussed.
"We eased monetary policy at last month's rate review because we thought we needed to be mindful of downside risks. We acted pre-emptively taking into account various uncertainties," Shirakawa told a news conference.
"We don't feel that we didn't do anything today. Instead, we feel that we are proceeding with powerful monetary easing."
As expected, the BOJ kept its policy rate at a range of zero to 0.1 percent by a unanimous vote and held off on additional monetary easing steps.
The decision sparked a brief yen rally against the dollar on disappointment by some market players who had bet the BOJ would follow Switzerland with measures to counter yen rises.
The central bank maintained its view that Japan's economy will resume a moderate recovery later this year with growth picking up on increases in output and exports.
It also stressed that core consumer inflation will remain near zero for the time being and reassured markets that it will keep rates virtually at zero until price stability is foreseen.
"As the BOJ clearly sees the economy picking up steadily, the central bank doesn't see a need to take immediate action," said Junko Nishioka, chief Japan economist at RBS Securities.
PRESSURE ON BOJ
Switzerland's move on Tuesday to set a ceiling for the soaring franc's exchange rate raised the possibility that some of the safe-haven inflows into the Swiss currency could shift to the yen, driving it again toward record highs.
That would pressure the BOJ to loosen policy further.
The BOJ had already eased policy last month by adding a further 10 trillion yen ($130 billion) to its pool of funds for asset buying and fixed-rate market operations. Any future easing would take the form of further increases in the scheme.
"The BOJ probably opted to wait until they see how this month's FOMC affects markets and until the new government sets the tone on what it wants from the BOJ," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
"But the bank could prove to be too late in its action as the yen is prone to resume rises after the Swiss National Bank's decision."
The BOJ has plenty of reasons to save up ammunition for later. The European Central Bank may signal halting its rate tightening cycle at a meeting on Thursday while the Federal Reserve is seen adding monetary stimulus on September 20-21, which could again weaken the dollar.
There is also no guarantee that easing now would stave off political pressure for more action in October, when debate on how to pay for post-quake reconstruction starts in earnest under new premier Yoshihiko Noda.
NO QUICK FIX
Growing fears that the world economy may slip back into recession are piling pressure on G7 finance chiefs, who gather in Marseilles on Friday. The discussion is expected to center on whether there was wiggle room to ease up on austerity drives in some rich economies while boosting monetary stimulus.
But with monetary conditions already ultra-loose and its huge public debt limiting room for fiscal stimulus, Japan is left with few options to bolster an export-reliant economy vulnerable to sharp rises in the yen.
Shirakawa said there were limits to what more advanced nations could do in terms of fiscal and monetary stimulus, and warned of the drawbacks to keeping ultra-low rates for too long such as sowing the seeds of another asset bubble.
"Monetary policy may be able to ease the pain from balance sheet adjustments. But the adjustment from past excesses itself will not disappear," he said, calling for the need for patient reforms to fix structural problems plaguing each economy.
($1 = 77.115 Japanese Yen)
(Additional reporting by Rie Ishiguro, Stanley White and Kaori Kaneko; Writing by Leika Kihara and Tomasz Janowski; Editing by Kim Coghill)
But strategists CNBC spoke to say further intervention by the Bank of Japan to weaken the yen is unlikely, even if the Swiss maneuver prompts more safe-haven inflows into the Japanese currency.Jesper Koll, Head of Japanese Equity Research at JPMorgan Securities Japan, says that with the Japanese economy on the rebound, there simply isn't enough urgency among policy makers despite the constant jaw-boning by officials."The real point is: when do corporate profits in Japan get squeezed to such an extent that...you have a national emergency?” Koll noted.“If you look at corporate profit performance, if you look at the exporters, if you look at the machinery companies, if you look at the car companies, you actually do see that they're doing better than expected. So, dollar-yen is in the headline, but it's not really forcing the economic crunch here in Japan.”On Tuesday, the Swiss National Bank said it would cap the Swiss franc's gains against the euro [EURCHF=R Loading... () 
] at 1.20, sending the Swissie plummeting 10 percent against the single currency.According to Kathy Lien, Director of Currency Research at Global Forex Trading, a similar dollar-yen arrangement does not make sense for Japan, especially from a trade perspective."Switzerland can establish a euro-Swiss peg because 70 percent of all their trade is done with the European Union. It does not make sense for the Japanese to establish a dollar-yen peg because less than 20 percent of their trade is done with the U.S.," Lien said. " So having a dollar-yen peg would not achieve the same results as having a euro-Swiss peg for the SNB."The Bank of Japan has conducted two rounds of currency interventions so far this year, the first time in March and subsequently in August. Both rounds failed to keep the yen down for long. On Wednesday, dollar-yen [JPY= Loading... ()