Japan's economic recovery relies on an increase in consumer spending

At the same time, fresh data showing a slowdown in Japanese economic growth pushed the yen down to a three-month low against the US dollar.

The Japanese currency plummeted to 120.97 against the greenback as analysts speculated that rates would only rise again in the fourth quarter.

Japan's last rate increase - to 0.5% - took place in February.

Its previous decision to end its zero rates policy took place last year after signs of a pick-up in the economy.

Capital spending weak

The Bank of Japan's decision to keep leave rates unchanged at 0.5% came hours before government figures showed the economy had expanded at a slightly slower pace in the first three months of the year than analysts expected.

Weak capital spending, which had risen 2.3% in the previous quarter, pulled back economic activity from January to March 2007.

Growth came in at an annualised rate of 2.4% - still better than the 1.3% rise in the US economy over the same period.

But the fall in March's consumer prices has raised fears that deflation has not quite been eliminated.

This would not deter the central bank from hiking interest rates in the future though, the Bank of Japan governor Toshihiko Fukui said.

"I'm not saying we can raise rates any time when prices are falling," said Mr Fukui.