<div><p>Japan's central bank, facing political pressure not to scale down stimulus measures too early, kept its super-low interest rates unchanged Tuesday, saying beating deflation was a critical challenge.</p><p>The move disappointed some investors who had apparently been hoping for fresh action by the Bank of Japan to shore up financial markets, boost flagging economic growth and stem a slump in consumer prices.</p><p>Tokyo's Nikkei-225 stock index tumbled 1.78 percent, ending at a five-week low as worries about a stronger yen and possible action by China to cool its economy added to the cautious mood.</p><p>The Bank of Japan held its benchmark lending rate steady at 0.1 percent, where it has been since December 2008, at the end of a two-day meeting.</p><p>The central bank maintained its projection that Japan's economy would see three years of deflation as it claws back from its worst slump in decades, but said that the price falls might be less severe than previously thought.</p><p>Consumer prices are expected to drop 1.5 percent in the current financial year to March, followed by a further decline of 0.5 percent next year and 0.2 percent the following year, the BoJ said.</p><p>In October it had projected falls of 1.5 percent this year, 0.8 percent next year and 0.4 percent the year after.</p><p>"The Bank recognises that it is a critical challenge for Japan's economy to overcome deflation and return to a sustainable growth path with price stability," the BoJ said in a statement.</p><p>Japan was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, hitting corporate earnings and prompting consumers to put off purchases in the hope of further price drops.</p><p>The government has urged the central bank to use all the ammunition at its disposal to prevent the country returning to a similar vicious circle.</p><p>Hours before the BoJ's latest decision was announced, Finance Minister Naoto Kan said he wanted to stamp out deflation within about three years, in cooperation with the Bank of Japan.</p><p>"We have yet to exit deflation, but with efforts by the BoJ, I think and I hope we will see signs of being out of deflation within two to three years," Kan, who has been in the post for just a few weeks, said in parliament.</p><p>Japan plunged into a year-long recession in 2008 as its exports collapsed due to a severe global downturn.</p><p>It returned to growth in the second quarter of 2009, but the recovery remains fragile with falling consumer prices, high public debt and weak domestic demand all major concerns for policymakers.</p><p>"We expect Japan to remain in deflation until the end of 2011, even if the Japanese economy continues to grow robustly through this period," said Societe Generale chief Asia economy Glenn Maguire in Hong Kong.</p><p>The BoJ upgraded its growth forecasts slightly Tuesday, predicting that the economy would shrink 2.5 percent in this financial year to March before rebounding 1.3 percent next year.</p><p>In October the BoJ had forecast a 3.2 percent contraction in Japan's gross domestic product this year followed by a 1.2 percent expansion next year.</p><p>"Japan's economy is picking up mainly due to various policy measures taken at home and abroad, although there is not sufficient momentum to support a self-sustaining recovery in domestic private demand," the Bank said.</p><p>-- Dow Jones Newswires contributed to this story --</p><img src="http://admatch-syndication.mochila.com/images/ad.gif?aid=67807356&bid=informcom" /></div><div id="copyright"><div>

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