Japan's central bank kept interest rates just above zero Tuesday, pledging to fight deflation and preserve recovery in the world's second-biggest economy.
The Bank of Japan policy board voted unanimously to keep the overnight call rate target at 0.1 percent, as widely expected even amid a resurgent yen. The central bank has maintained the super-low interest rate since December 2008 when it was cut from 0.3 percent.
Helped by export demand from emerging economies, Japan's economy is improving, the central bank said. But it expects stagnant growth until the middle of next fiscal year starting April.
"Japan's economy is picking up mainly due to various policy measures taken at home and abroad, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand," the seven-member board said in a statement.
The central bank narrowed its forecast for economic contraction and now projects gross domestic product to fall 2.5 percent this fiscal year through March. In October, it had predicted a 3.2 percent contraction.
The board expects GDP to expand 1.3 percent next fiscal year, up from 1.2 percent it forecast in October.
On the deflation front, however, the central bank said prices will probably keep falling for another couple of years. It pledged to maintain an "extremely accommodative financial environment" to help boost prices.
Deflation can drag down an economy by lowering company profits, leading to wage cuts and postponed purchases by wary consumers. Japan is especially sensitive to the issue after experiencing the "Lost Decade" in the 1990s, when it was beset by extended price falls.
Japan's recovery also faces other headwinds, including a resurgent yen. The Japanese currency has gained about 3 percent against the dollar since the beginning of the year. The dollar fell to 89.86 yen Tuesday afternoon.
A strong yen hurts the competitiveness of exporters like Toyota Motor Corp. and Sony Corp. and erodes the value of their overseas earnings.
The central bank last month introduced a 10 trillion yen ($111 billion) loan program in an attempt to foster liquidity after the yen rose to a 14-year high against the dollar.
Analysts said the bank may have to do more in the coming months.
"The need for more quantitative easing is as strong as ever," said Testufumi Yamakawa, chief Japan economist at Goldman Sachs.
Probable options include extending the low-interest lending facility or buying more short-term government bonds, Yamakawa said in a report.