The Bank of Japan kept its policy settings unchanged on Wednesday, saving up its scant ammunition for later, while the yen stabilized in the wake of Switzerland's radical action to curb its soaring currency.

The central bank maintained its assessment that the economy was steadily picking up, with output and exports nearly returning to levels before a devastating earthquake and tsunami in March tipped Japan into recession.

It also reiterated its view that the economy should resume a moderate recovery later this year, but with a note of caution.

We feel the need to carefully examine how uncertainty on overseas developments and ensuing fluctuations in currencies and financial markets could affect Japan's economy, it said.

With clouds gathering over the world economy and another export-crippling yen rally still a risk, markets are focusing on how strongly BOJ Governor Masaaki Shirakawa will signal the chance of more monetary easing before he travels to France for a weekend Group of Seven gathering.

The BOJ chief was to hold a news conference later in the day.

As expected, the central bank kept its policy rate at a range of zero to 0.1 percent by a unanimous vote and held off on additional monetary easing steps.

It also stressed in its statement that core consumer inflation will remain near zero for the time being and reminded markets that it will keep interest rates virtually at zero until stable price growth is foreseen.

As the BOJ clearly sees the economy picking up steadily, the central bank doesn't see a need to take immediate action, said Junko Nishioka, chief Japan economist at RBS Securities.

PRESSURE ON BOJ

Switzerland's move on Monday to set a ceiling for the soaring franc's exchange rate against the euro raised the possibility that some of the safe-haven inflows into the Swiss currency could shift to the yen, driving it again toward record highs.

That would put the BOJ under pressure to act and further loosen policy.

The BOJ had already eased policy last month by adding a further 10 trillion yen ($130 billion) to its pool of funds for asset buying and fixed-rate market operations.

The BOJ probably opted to wait until they see how this month's FOMC affects markets and until the new government sets the tone on what it wants from the BOJ, said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

But the bank could prove to be too late in its action as the yen is prone to resume rises after the Swiss National Bank's decision.

Shirakawa will probably signal the BOJ's readiness to act later if the recovery looks at risk, as some central bankers already have doubts whether it will materialize given slowing factory output at home and recession fears in the United States and Europe.

Growing fears that the world economy may slip back into recession after a brief recovery from the global financial crisis are piling pressure on G7 finance chiefs, who gather in Marseilles on Friday.

The discussion is expected to center on whether there was wiggle room to ease up on austerity drives in some rich economies while boosting monetary stimulus.

But with monetary conditions already ultra-loose and its huge public debt limiting room for fiscal stimulus, Japan is left with few options to bolster an export-reliant economy vulnerable to sharp rises in the yen.

Jun Azumi, who became finance minister when a new cabinet was formed last week, repeated Tokyo's verbal warning to markets against pushing the yen up too far.

The BOJ has plenty of reasons to save up ammunition for later. The European Central Bank may signal halting its rate tightening cycle on Thursday and the Federal Reserve is seen adding monetary stimulus on September 20-21, which could again weaken the dollar.

There is also no guarantee that easing now would stave off political pressure for more action in October, when debate on how to pay for post-quake reconstruction starts in earnest under new premier Yoshihiko Noda.

($1 = 77.115 Japanese Yen)

(Additional reporting by Rie Ishiguro, Stanley White and Kaori Kaneko; Writing by Leika Kihara and Tomasz Janowski; Editing by Kim Coghill)