The Bank of Japan on Wednesday decided to keep its ultra-loose monetary policy unchanged, as expected, suggesting that the bank is moving cautiously amid concerns over the recent turmoil in the bond market.

Reaffirming its latest easing measures, the policy board said the bank will conduct money market operations so that the monetary base will increase at an annual pace of about JPY 60-70 trillion.

In the April meeting, the board led by Governor Haruhiko Kuroda pledged to double the monetary base and its holdings of Japanese Government Bonds in two years. The easing was aimed at ending 15 years of deflation that would gradually put the economy on track for sustainable growth.

The bank said today it will continue to purchase Japanese government bonds so that the amount outstanding will increase at an annual pace of about JPY 50 trillion as planned. The purchases of JGBs are expected to put downward pressure on interest rates across the yield curve.

Kuroda said Monday that it was natural for interest rates to rise gradually if the outlook on prices and economy improves. However, the recent sudden spike in bond yields poses a policy dilemma for the bank as its seeks to achieve its inflation target of 2 percent "in about two years."

Meanwhile, the policy board upgraded its assessment of the economy, a couple of days after the Cabinet Office raised its economic view citing improving exports aided by the weak yen.

The BoJ said that the economy has started to pick up, while exports have stopped decreasing with overseas economies moving away from deceleration phase. According to the central bank, overseas economies are heading towards a pick up.

Last month, the bank's assessment was that the economy "has stopped weakening and has shown some signs of picking up."

"Industrial production has stopped decreasing and signs of picking up have become increasingly evident," the bank said. It also noted that some indicators suggested a rise in inflation expectations.

With regard to the outlook, the bank said the Japanese economy may return to a moderate recovery path amid resilient domestic demand and a gradual improvement of growth in overseas economies. The BoJ expects the year-over-year rate of change in the CPI to register smaller declines for the time being, and gradually turn positive thereafter.

Meanwhile, Board member Takahide Kiuchi raised objection to the central bank's two-year time frame to achieve the 2 percent inflation target.

Kiuchi proposed that the bank should aim to achieve the price stability target "in the medium to long term" and "designate quantitative and qualitative monetary easing as an intensive measure with a time frame of about two years." This proposal was defeated by 8-1 in the nine-member board.

According to most recent official data, Japan's economy grew at an annual rate of 3.5 percent in the first three months of 2013. This was stronger than the 0.2 percent growth in the fourth quarter of 2012. On a quarterly basis, GDP expanded 0.9 percent.

RTTNews