Toshihiko Fukui has held his hands up to his mistake

Under a grilling from an opposition MP, the governor said he would not keep any profit made from investing in the fund, managed by Yoshiaki Murakami.

There have been calls for him to quit, but Prime Minister Junichiro Koizumi was strong in his support for Mr Fukui.

The bank met on Thursday and voted to keep its zero interest rate policy which is helping Japan's recovery.

'Commotion'

Mr Fukui has admitted investing $87,000 in the fund in 1999, before he became the bank's governor, although he kept his investment while holding the top job.

He also told the parliamentary committee he had shares in other companies, but had not traded them - in line with bank rules.

"I apologise deeply for causing a commotion," Mr Fukui said.

Only some opposition MPs have called for the governor to resign, though government members have said Mr Fukui was "careless".

Signs of improvement

The scandal comes at a time when the bank needs stability as it moves to end five years of zero interest rates.

It has been urged to wait by the government, which fears the move would suffocate the country's steady economic recovery.

Japan's economy has been showing signs of improvement. In the first quarter of 2006, it grew at 3.1% - the fifth consecutive quarter of expansion.

But its markets took a tumble this week, with the Nikkei index losing 4.1% on Tuesday alone.

Across the globe, markets have slumped in recent weeks, amid concerns over inflation and higher interest rates.

The European Central Bank has raised rates, the Bank of England is expected to do so later this year and the US Federal Reserve is tipped to hike interest rates for the 17th time in a row at the end of June.

Mr Murakami has admitted insider trading in a takeover initiated by Livedoor in 2005.