The Bank of Japan offered banks more short-term funds after an emergency meeting on Tuesday, winning an immediate reprieve from government pressure to help avert recession before upper house polls next year.

We can say this is quantitative easing in the broad sense that we are trying to ensure banks are not faced with (liquidity) constraints, said Governor Masaaki Shirakawa, casting the move as an attempt to contain the fallout of Dubai's debt woes.

Market reaction to the bank's decision to offer 10 trillion yen in three month funds at 0.1 percent suggested investors had anticipated a more dramatic response.

The finance minister had raised expectations by talking openly of quantitative easing -- a policy of flooding banks with cash to stimulate lending.

The dollar fell against the yen and 10-year Japanese government bond futures trimmed gains as investors unwound positions taken after the emergency meeting was announced following weeks of government pressure.

There will hardly be an impact on the real economy, said Hirokata Kusaba, senior economist at Mizuho Research Institute.

The BOJ knows there is very little left it can do, but probably made the move today because it was under pressure from the government. Not doing anything was not an option.

The BOJ kept its key policy interest rate at 0.1 percent.

Shirakawa said government pressure had nothing to with the BOJ decision. He said it was a response to a yen rally and a drop in stock prices last week after debt troubles in Dubai briefly threatened to reignite the turmoil of the global credit crisis.

The government appeared to have been placated for now.

The BOJ's action at this time is highly welcome, Prime Minister Yukio Hatoyama, who holds talks with Shirakawa on Wednesday, told reporters.

Ministers said they hoped it would bring down long-term interest rates. That would reduce borrowing costs for the most indebted government in any rich nation and lower the risk of another recession after the longest economic contraction on record.

If they were free from pressure, they wouldn't have done anything, because they've been saying their assessment hasn't changed, said Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong.

After rebuffing criticism that its view of the economy was too rosy, the central bank had shown signs of caving in and some analysts had expected it would pour more cash into the banking system, in a near replica of attempts to stimulate lending after a property bubble burst in the 1990s.

Others had forecast purchases of more government bonds.

But the BOJ stopped well short of both responses. It did not broaden the range of collateral against which it would lend the new three-month funds, a move that could channel some cash to smaller companies which the government says are struggling to access credit.

The new money would now just sit in bank deposits, said Mizuho's Kusaba.

But banks already have access to cheap money, so the additional funds are unlikely to flow to the private sector, he said.

The situation is now such that even with money so cheap, companies are not investing and consumers are not spending.

The emergency meeting was the first since last December.

Finance Minister Hirohisa Fujii welcomed the BOJ's decision.

Fujii and his cabinet colleagues had kept up unrelenting pressure on the central bank last week, raising expectations of a BOJ volte-face. One minister had even accused the central bank of falling asleep at the wheel.

Quantitative easing could have a positive impact on the economy, Fujii told reporters after a cabinet meeting earlier in the day, though he added he would not force such a policy on the central bank.

After a week of fierce public criticism from ministers, Shirakawa said on Monday the BOJ shared the government's view that Japan was in deflation and that the bank was ready to act in the event of renewed financial turmoil.

Hatoyama's Democratic Party, which rode to power promising to cut spending on public works so it could offer more support to households, fears another recession in early 2010 after the worst economic contraction on record ended this year.

That could hurt the DPJ's chances of winning an outright majority in the upper house to avoid relying on two small, vocal coalition allies to get measures passed unopposed.

Reducing public works spending could slow growth early next year, and with public debt set to exceed 200 percent of gross domestic product next year the government cannot spend enough to stimulate demand.

The government will this week compile an additional budget, likely worth more than 2.7 trillion yen, but economists say that will have little effect as the government is just reshuffling money allocated by the previous administration.

Any new spending may force the government to miss its 2010 borrowing target of 44 trillion yen. Fitch Ratings warned last month a big increase in borrowing could prompt a downgrade of Japan's credit rating, raising government borrowing costs.

To see a graphic of fiscal pressures building in Japan, click: http://r.reuters.com/paw97f

The last time the BOJ had a public showdown with political leaders was in August 2000, when it raised rates despite government opposition.

Just eights month later the central bank had to abandon its rate target and adopt quantitative easing, flooding markets with excess cash in a bid to fuel growth.

(Additional reporting by Stanley White; Writing by Leika Kihara; Editing by Dayan Candappa and Hugh Lawson)

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