JAPAN'S central bank left its key interest rate steady yesterday, choosing again to hold to the status quo amid increasing nervousness about the country's slowing economy.

Facing the prospect of recession, the seven-member central bank policy board voted unanimously during a two-day meeting to keep the benchmark overnight call rate at 0.5 percent - the lowest rate among major world economies. The widely expected decision enables board members to continue assessing the country's economic health before taking action.

In its statement, the Bank of Japan downgraded its overall view of the world's No. 2 economy, calling growth "sluggish against the backdrop of high energy and materials prices and weaker growth in exports."

It predicted inflation, now at its highest level since the early 1990s, to accelerate in the coming months due to rising food and energy prices.

Bank of Japan Governor Masaaki Shirakawa denied Japan was suffering from stagflation, a dangerous mix of sluggish growth and inflation. And the economy was not headed into the deep troubles it faced in the 1990s, despite the emerging signs of a slowdown and escalating prices, he said. "There is little risk of the economy falling into a major downturn," Shirakawa said yesterday in Tokyo.

The central bank also warned of instability in global financial markets and threats to overseas economies, particularly the United States rising commodity prices, which it said could weigh on consumer demand.

"Although the economy is under no pressure to adjust production capacity and labor, these downside risks to the economy demand attention," the statement said.

Last week, the government reported that Japan's economy shrank in the second quarter, with gross domestic product down 2.4 percent.