BOJ vows to act, but leaves few clues on next move

The central bank also repeated that it needed to watch out for downside risks to growth amid increasing uncertainty over the outlook for the U.S. economy, which has jolted currency and stock markets in recent weeks.

But market players see a small chance of aggressive easing steps from the Japanese central bank as it stuck to its forecast of a moderate economic recovery, and Shirakawa said monetary policy was not directly aimed at the yen.

“We are always considering various policy options,” Shirakawa told a news conference. “But monetary authorities are unable to control currency rates freely ... We are carefully watching how the yen's rise impacts the Japanese economy.”

The yen briefly climbed to 83.70 against the dollar, near the 15-year high hit last month, following his comments.

Japanese policymakers have tried to talk down the yen and threatened to intervene in the currency market after its surge.

The BOJ also stands ready to ease further if the yen soars at a pace of 1 to 2 percent in a single day. Otherwise, it hopes to wait until next month, when it is seen revising down its economic and price forecasts in a semiannual report due on Oct. 28.

The BOJ boosted its cheap loan scheme on Monday of last week, bowing to government pressure for steps to protect the fragile recovery. But the move did little to deter yen gains or stock price falls as investors saw it as a symbolic gesture with little effect in supporting the economy and beating deflation.

That has led some BOJ officials to believe that bolder action is needed to send a clearer message to markets that it is determined to keep the strong yen from harming the economy.

There is no consensus yet on what the next step should be, but the list of options includes a return to zero interest rates and an increase in the bank's government bond purchases.

Expectations of further monetary easing have pushed down the short end of Japan's bond yield curve, while the long end has been pushed up by speculation that Ozawa, if he wins next week's vote, may take a more fiscal expansionary stance than Kan.

But the yield curve has flattened beyond the 10-year zone lately as investors hunting for bargains trimmed earlier losses in the superlong sector, suggesting that the recent sharp rise in yields may have started to peter out.

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