TOKYO (Reuters) – The Bank of Japan maintained its ultra-loose monetary policy on Thursday and reaffirmed its view the economy is on a solid footing, even as fears of slowing global growth jolt markets and lowered prospects for hitting its 2 percent inflation target.

Investors are focusing on BOJ Governor Haruhiko Kuroda’s post-meeting briefing for clues on how rising global uncertainties and signs of bond market strain could affect future policy.

In a widely expected move, the BOJ kept its short-term rate target at minus 0.1 percent and the 10-year yield target around zero percent under a policy dubbed yield curve control (YCC). The decision was made by a 7-2 vote.

“Japan’s economy is expanding moderately,” while overseas economies continue to grow steadily as a whole, the central bank said in a statement announcing the policy decision.

The BOJ is in a dilemma. Years of heavy money printing has left it with little ammunition to battle another recession, and the global economic slowdown is depriving the central bank of any near-term chance to restock its tool-kit.

Even maintaining the current stimulus is proving costly as ultra-low rates strain regional banks’ profits and its huge purchases dry up bond market liquidity.

“The BOJ is being caught between the need to address the side-effects of its stimulus, and prospects of a global slowdown and trade war. As such, it may not be able to move in either direction next year.” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

“The BOJ may be forced into further easing in 2020 as Chinese and U.S. economies slow more, which would hurt Japan’s exports and capital expenditure.”

The central bank board met hours after the U.S. Federal Reserve raised rates and said it was keeping the core of its plan to tighten monetary policy intact, despite rising uncertainty about global economic growth.

TOLERATES YIELD FALLS

Subdued inflation has forced the BOJ to maintain a massive stimulus despite the rising cost of prolonged easing, such as the hit to financial institutions’ profits from near-zero rates.

The central bank tweaked its policy framework in July to make it more sustainable, including by allowing bond yields to move more flexibly around its zero percent target.

The move was partly intended to allow for a natural rise in long-term rates, so financial institutions could reap profits from a steepening yield curve.

But Japanese long-term rates have traced U.S. Treasury yields lower reflecting investors’ risk-averse stance. The yield on the 10-year Japanese government bond fell to 0.010 percent on Wednesday, its lowest since September last year.

Markets are on the look-out on whether Kuroda could offer any hints on what the BOJ could do if 10-year yields slide to negative territory.

Sources have told Reuters the BOJ will tolerate negative long-term rates, as long as the 10-year yield moves within the range of around minus 0.2 to plus 0.2 percent set in July.

Still, any such market moves could cause unease among some BOJ board members, who have publicly voiced concern over the dangers of excessive yield declines, analysts say.

“The BOJ could slow its bond buying to prevent excessive yield falls. But doing so too much risks pushing up the yen,” said Takahide Kiuchi, a former BOJ board member who is now executive economist at Nomura Research Institute.

“This is just an illustration of the flaws of YCC.”

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