The Bank of Japan yesterday defied domestic and international calls for a loosening of monetary policy to weaken the yen before this weekend's Group of Seven meeting in Washington. Instead, it decided to leave policy broadly unchanged.

After an eight-hour meeting, the central bank's nine-member policy board said it would continue to supply surplus funds to the money markets to push overnight rates to zero, but would not deliberately try to weaken the yen as well. The bank's governor, Masaru Hayami, said: "Manipulating exchange rates is not an objective of monetary policy."

His statement unsettled the markets, which had expected some monetary easing before the G7 meeting. Senior Japanese officials have hinted that the US might be persuaded to act to weaken the yen if the bank demonstrates its support for such action by implementing a relaxed monetary policy.

But economists and government officials yesterday admitted that the prospect of joint intervention with the US around the time of the G7 meeting was fading.

Echoing this view, Mr Hayami warned that a strong yen was now primarily "a problem for Japan".

His hawkish position infuriated the ministry of finance and left Japan's business leaders warning that the yen could strengthen further in the coming days.

Takeshi Imai, head of the Keidanren, the business organisation, said: "I fear this will be interpreted as an opinion gap between the ministry and the bank, and the US and Japan, and that will cause the yen to rise."

The currency rallied 2.5 yen against the dollar after the bank's decision, leaving it trading at about 104 yen in late Tokyo markets. This is close to the 3 1/2-year highs of 103.2 yen of last week.

These swings prompted angry criticism of the bank from some Japanese politicians, who fear that a stronger yen will derail Japan's fragile recovery.

Ichizo Ohara, influential adviser to Keizo Obuchi, the prime minister, warned that the bank's executives appeared to be "only thinking of themselves".

However, the bank policy board concluded that loosening policy was unlikely to have any meaningful impact on the economy because it was already trying to bring overnight interest rates to zero by supplying about 1,000 billion yen (€9.13 billion) in surplus liquidity to the markets each day.