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The Bank of Japan offered banks more short-term funds after an emergency meeting on Tuesday, relieving government pressure on the central bank to help avert another recession before upper house polls next year.

Markets primed for a return to full quantitative easing reacted with disappointment to the decision to offer 10 trillion yen in three month funds at 0.1 percent. Analysts said the funds would do little to tackle deflation, although by lowering yen lending rates they may check the currency’s rally.

The prime minister and other ministers welcomed the move, suggesting the main outcome of the meeting was to publicly mend fences with the government, which was pressing the BOJ for a policy response to deflation and the risk of a new recession.

“If the BOJ were free from pressure, they wouldn’t have done anything, because they’ve been saying their assessment hasn’t changed,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong.

By yielding to political pressure, the BOJ had left the door open to yet more demands as Japan grapples with the fallout of last year’s recession, the worst on record, analysts said.

“This isn’t the end of the story,” said Richard Jerram, chief Japan economist at Macquarie Securities in Tokyo.

“There are going to be more periods of government pressure and more periods of BOJ response.”

Governor Masaaki Shirakawa, who holds talks with Prime Minister Yukio Hatoyama on Wednesday, said the decision had nothing to do with government pressure and cast it as an attempt to contain the fallout of Dubai’s debt woes.

“We can say this is quantitative easing in the broad sense that we are trying to ensure banks are not faced with (liquidity) constraints,” he said after the meeting, at which the BOJ left interest rates unchanged at 0.1 percent.

Few economists saw the move as a return to quantitative easing — a policy of flooding banks with cash to stimulate lending — which the BOJ pioneered as it tried to pull Japan out of deflation earlier this decade.

Other central banks adopted variations of the policy as the credit crisis triggered bank failures last year and global recession.

With the world economy recovering, most of the BOJ’s peers are on hold. The European Central Bank may even begin unwinding ultra-loose policy this week.

“Today’s step is clearly not what many people would see as quantitative easing,” said Takahide Kiuchi, chief economist at Nomura Securities in Tokyo.

“I think markets wanted something much bigger.”

The finance minister had raised market expectations by talking up the benefits of quantitative easing after weeks of government pressure for a BOJ response to the economic crisis. One minister said the BOJ was “asleep at the wheel.” 

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