The Bank of Japan shocked markets Thursday as it held fire on a fresh round of widely expected stimulus measures, sparking questions about whether it had anything left in its arsenal to kickstart the stuttering economy.
Dealers were caught off guard by the decision, especially after another set of weak economic data in the morning had turned up the heat on policymakers to help ignite growth.
The yen soared on the decision -- the BoJ also cut back its inflation and growth projections -- with the dollar briefly plunging as low as 108.77 yen just after the announcement from 111.78 yen.
And Tokyo's Nikkei stock index plunged more than three percent, with exporters hit by the yen surge."Markets now think the impact of any more BoJ easing measures are going to be limited," said Minori Uchida, head of Tokyo global markets research at Bank of Tokyo-Mitsubishi UFJ.
The BoJ's decision to push back its timeline for a 2.0 inflation target -- now expected before early 2018 rather than by September 2017 -- underscored the challenges in conquering years of growth-sapping deflation.
"This is the last chance for (BoJ governor Haruhiko) Kuroda," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
"But the reality is that achieving the inflation target is going to be extremely difficult."
The Bank's inflation target and huge asset-buying plan is a cornerstone of Tokyo's drive to reignite Japan's economy.Speculation for more easing had picked up pace as figures earlier Thursday showed consumer prices fell the most in three years.
The worse-than-expected fall -- 0.3 percent in March from a year ago -- came as separate data showed household spending remains weak, although factory output rebounded.
Japan's economy has largely defied several years of central bank and government remedies aimed at boosting prices as well as broader activity.
- Shrinking economy -
On Thursday, the central bank pointed to weakness in overseas markets and the impact of deadly earthquakes in southern Japan this month, which led to factory shutdowns, for scaling back its economic growth projections.
The economy shrank 0.3 percent in the last quarter of 2015 and there are concerns that the January-March GDP data will also come in weak.
The BoJ's options Thursday had included expanding its huge asset purchase programme or fiddling with a negative rate scheme that it launched in January.
The rate move -- which aims to encourage lending by essentially charging banks for storing some excess reserves in BoJ vaults -- was widely panned as a desperate move to save Prime Minister Shinzo Abe's growth drive.
Abe swept to power more than three years ago vowing to revive Japan's fortunes with a mix of policies centred on central bank monetary easing, targeted government spending and deregulation.
But his attempts to power inflation has been hit by falling energy prices, coupled with recent robustness in the yen driving down the cost of imports.
In a sign of growing unease over Japan's economy, the International Monetary Fund this month cut its growth forecast for the country, saying GDP would shrink next year as a planned sales tax rise tightens consumer spending.
The IMF also said deflation -- a persistent and debilitating decline in prices that weighed on the economy for years -- could return to Japan.