The apparent defiance dashed market expectations of a further easing as part of a deal to gain US help in pegging back the yen.

The central bank's policy board voted by majority to continue guiding the key overnight interest rate virtually to zero.

The BoJ said it would provide more ample funds to the money market, the same phrase it has used since embarking on its zero interest rate policy in February. This leaves open the possibility that the central bank could take more accommodative moves in its market operations.

"The BoJ preserved its independence by deciding to keep policy unchanged," said senior analyst Takehiro Sato at Sumitomo Bank. "It also strongly indicated that it would not conduct monetary policy aimed at currency movements, which is logical."

But marketswere taken by surprise, having already priced in some kind of monetary easing, with the dollar immediately plunging more than 1.5 per cent against the yen to around 104.4.

"Basically, Japan is not very good at managing market expectations," said Gerard Lyons, global head of treasury research at Standard Chartered in London. "They tend to lead the market to water and then not allow the market to drink."

Finance minister Kiichi Miyazawa and other officials have made a show of arm-twisting the central bank into taking a radical further loosening of policy, hinting that this was part of a deal to get US authorities to join in yen-selling market interventions.

These comments and Japanese media reports had fuelled expectations that the BOJ would take radical measures such as targeting longer-term interest rates or even leaving its yen-selling currency interventions "unsterilised" by no longer mopping up the excess yen from the interbank market.

Market watchers looking for a "stealth" easing will becloselywatching the BoJ's next money market operations at 9:20 am (0020 GMT) on Wednesday to see if the central bank boosts the daily surplus, currently about one trillion yen ($9.52 billion).

The central Bank governor Masaru Hayami also said he had instructed bank officials to consider using short-term government notes in market operations.

But the central bank said that although it shares the government's concern that the recent yen rise could snuff out Japan's nascent recovery, it stressed that BoJ monetary policy is not and cannot be aimed at currency levels.

The bank noted in a statement that markets had been moving in recent days on speculation about its monetary policy, but asserting its independence, said: "There was no pre-arrangement of a certain course, or discussions with outsiders."

Miyazawa reacted stoically, declining to comment on the BoJ decision and saying it was understandable that an independent central bank would have different views from the government on monetary policy and foreignexchange.

The finance minister had hinted last week a deal was in the works, summoning Hayami to a rare and public meeting and dispatching his top international deputy to Washington to discuss currencies ahead of this Saturday's meeting of finance ministers and central bankers from the G-7 industrial powers.