The interest-rate decision was widely expected, as the country fights to stage a fragile recovery, led by its export sector.

Despite a low level of domestic demand, the government maintains that better times are around the corner.

Such optimism seemed to be reflected in a business survey on Friday, measuring corporate views on domestic confidence.

The survey, which subtracts the percentage of firms saying domestic economic conditions were unfavourable from those reporting favourable conditions, saw an improvement in the three months to June.

The business survey index stood at minus 14 in the April-June quarter, compared with minus 37 in January-March period.

IMF criticism

But Japan's interest-rate decision follows harsh words from the International Monetary Fund on Thursday.

The IMF has given its prescription from a long-term perspective, but I don't think the BoJ feels that a special action on deflation is needed

Yasuo Goto Mitsubishi Research

In a review of Japan, the IMF said the economy was poised to contract by 0.5% this year and urged the bank to implement monetary policy that would put an end to deflation.

But the central Bank of Japan (BoJ) has stuck to its pledge to keep interest rates just above zero as part of its plan to maintain liquidity in the economy.

The Bank has also resisted pressure to set a target for inflation - a widely used practice to control the prices of goods.

Japan suffers from deflation - where prices have been falling for more than three years - and the IMF believes the country is not doing enough to combat this.

"The IMF has given its prescription from a long-term perspective, but I don't think the BoJ feels that a special action on deflation is needed at this particular time," said Yasuo Goto, economist at Mitsubishi Research Institute.

The IMF also renewed calls for the country to overhaul its banking sector, which has been plagued by a superfluity of non-performing loans.

Recovery?

Japan's gross domestic product achieved a promising annual rate of 5.7% in the January-March quarter, but that number could be revised down.

Many economists also expect a contraction in the three months to June.

Japan's economy has been in a slowdown for 10 years, but was pulled out of recession this year by a recovery in exports to Asia and the US.

However, fears that the US economy might lurch back into recession could badly knock the vulnerable Japanese economy.

Recent dives on the Tokyo stock market - in spite of gains in the last few days - and a weakening in the dollar have also made the Japanese government nervous that the wings of its fledgling recovery could be clipped.

Tokyo's main stock market was up nearly 2% on Friday, following a three-day rally on Wall Street.