The decision had been widely anticipated by investors. The rate has remained unchanged for the past 12 months.

The Bank of Japan said the country's economy is expanding moderately "although the pace of growth seems to be slowing mainly due to the drop in housing investment."

BOJ Gov. Toshihiko Fukui told reporters Japan's moderate economic recovery would continue but took note of the continuing global financial turmoil, saying it requires careful handling of monetary controls, Kyodo news service reported.

"It is important to proceed with the adjustment process in an orderly manner," he told reporters. "And at the same time we need to carry out adjustments in the real economy in an orderly way," he said.

On keeping the interest rate unchanged, Fukui said, "We judge it is best not to change the interest rate in order to realize sustainable economic growth under stable prices."

On global economy, he said, "Uncertainty is growing as the turmoil triggered by subprime mortgage problems remains in the global financial market."