The Bank of Japan kept interest rates near zero and raised its economic assessment even as government pressure for it to fight deflation intensified.
Governor Masaaki Shirakawa and his colleagues held the overnight lending rate at 0.1 per cent, the central bank said in a statement today in Tokyo. The release came hours after Deputy prime minister Naoto Kan warned about the danger that falling prices pose to Japan's recovery from its worst postwar slump.
The divergence in judgment on the economic outlook indicates tensions may escalate between prime minister Yukio Hatoyama's government and the central bank. By highlighting deflation, politicians are sending signals to the bank that it should increase its purchases of government bonds, analysts say.
"Given the bank's independence, the government can't ask the BOJ directly to cut rates or buy more bonds," said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Company in Tokyo.
"That's why it's using this term 'deflation' to force the BOJ to step up its accommodative measures."
Gross domestic product grew an annualised 4.8 per cent last quarter, the fastest pace in more than two years, while a gauge of prices excluding imports tumbled the most in 51 years, a Cabinet Office report showed this week.
Deflation blighted Japan during its so-called lost decade of stagnation after an asset bubble burst in the early 1990s.