The Bank of Japan cut its economic growth forecast and predicted inflation would accelerate in a report that omitted a reference to raising interest rates for the first time in two years.
The world's second-largest economy will grow 1.5 percent in the year ending March 31, less than an October estimate of 2.1 percent, the central bank said in its semi-annual outlook today.
"The outlook for economic activity and prices is highly uncertain," the central bank said. "It is not appropriate to predetermine the direction of future monetary policy."
Governor Masaaki Shirakawa and his six colleagues today left the benchmark lending rate at 0.5 per cent.
Japan's economic growth is slowing as the US housing recession weighs on demand for the nation's exports and rising raw-materials costs fuel inflation and squeeze profits. Since becoming governor on April 9th, Mr Shirakawa has said the bank's policy direction is flexible.
"They made it clear that they now have a neutral bias," said Hiroshi Shiraishi, an economist at Lehman Brothers Japan in Tokyo. "The report makes clear that the downside risks in terms of growth dominate."
The yen traded at 103.77 per dollar at 3:37 p.m. in Tokyo from 104.02 late yesterday in New York. The yield on Japan's five-year note fell 8.5 basis points, the most in eight months, to 1.145 per cent.