The Bank of Japan (BoJ) faced mounting political pressure today to refrain from ending its ultra-easy policy.
Last week, the stock market was depressed and bond yields buoyed by growing expectations that the central bank would scrap its five-year-old policy of flooding the banking system with huge amounts of surplus funds - known as "quantitative easing" - at a policy-setting meeting later this week.
Prime Minister Junichiro Koizumi urged caution so as not to spoil a hard-won economic recovery.
Responding to questions in parliament, he said the central bank should act with prudence, given its clout over the nervous markets. "We cannot allow a setback in the current recovery track," he said.
"There are signs of deflation ending, but I am wary of whether deflation has been beaten. It must be judged cautiously."
Speculation of a BoJ policy change this week was spurred by a higher-than-expected reading on consumer price inflation last Friday, which appeared to suggest Japan's struggle with seven years of debilitating deflation is nearly over.
Japan's GDP grew at an annualised 5.5 per cent in the final three quarters of 2005, but a quarterly business survey by the Ministry of Finance today showed a softer-than-expected reading in capital spending, prompting many economists to lower their forecasts for next week's revised GDP data.
BoJ Governor Toshihiko Fukui kept his cards close to his chest today, saying he held no preconceived notions regarding monetary policy.