Tokyo, April 11 (Bloomberg) -- The Bank of Japan left policy unchanged, putting the onus on Prime Minister Junichiro Koizumi's government to clean up trillions of yen in bad loans, overhaul the tax system and end price declines. Bank of Japan Governor Masaru Hayami, who already cut interest rates to near zero and pumped trillions of yen into the banking system, has signaled it's the government's turn to take steps to fix the world's second-largest economy. Signs that an 18- month recession may end soon also lessened the urgency of easing policy, analysts said. The central bank has said any cash pumped into the banking system won't reach companies and consumers unless banks get rid of 36.8 trillion yen ($280 billion) in bad loans and start lending again. Bank lending hasn't gained for more than five years, sapping the economy of the cash it needs to grow. ``Given that there are few policy options left, the central bank won't take any action anytime soon,'' said Kazuhiko Ogata, a senior economist at HSBC Securities Japan Ltd. The yen weakened to 131.49 to the dollar from 130.71 in New York Wednesday after the central bank's unanimous decision, and the Nikkei 225 stock average fell 0.1 percent to 11,202.57. The 10- year Japanese government bond future for June delivery was unchanged at 138.46. While Hayami has urged Koizumi to pump taxpayers' money into banks to speed their disposal of bad loans, analysts say that's unlikely to happen.

Deflation Woes
The Financial Services Agency, which is completing an inspection of banks' balance sheets this week, ``will probably declare that the financial system is in OK shape, ruling out an immediate government bailout,'' said Koji Shimamoto, chief strategist at BNP Paribas Securities Japan Ltd. ``Investors won't be convinced.'' More than two years of deflation are compounding Japan's bad- loan problem and delaying an economic rebound. Falling prices dent corporate sales and profit, erode asset values and inflate the value of debt, making it harder for companies to repay loans. The government will discuss measures to tackle banks' bad loans at a meeting of Koizumi's key economic panel on Tuesday, Chief Cabinet Secretary Yasuo Fukuda said. The International Monetary Fund said in a report yesterday that both the Bank of Japan and the government must do more to combat deflation and revive growth.

Signs of a Rebound
``The combination of deflation and structural problems is a serious concern, underlining the urgency of additional monetary easing and aggressive structural reform,'' the fund said. Still, signs that Japan may pull out of recession in coming months reduce the need for immediate measures. The central bank last month raised its economic assessment for the first time in 20 months as rising global demand revives exports and helps manufacturers cut inventories, and the government yesterday raised its assessment for a second month. ``The imminent threat to the economy is fading, and that takes some pressure off the central bank to do more,'' said Seiji Shiraishi, chief market economist at Daiwa Securities SMBC Co. The Bank of Japan's Tankan business survey last week showed confidence among large manufacturers was unchanged in the first quarter, snapping four quarters of declines, and exports rose in the first two months of the year.

Reserves
After pumping extra cash into the banking system ahead of the fiscal year-end on March 31, the bank returned to its target of between 10 trillion yen and 15 trillion yen for reserves it holds for commercial lenders. The bank, which breached that limit to meet year-end demand for cash as companies closed their books, lowered the reserves to 19.8 trillion yen today from a peak of 27.7 trillion yen on March 29, the final trading day of the fiscal year. The central bank said in a statement it's ready to provide more funds to the banking system if needed to keep financial markets stable. Minutes of the meeting will be published on May 24. Nobuyuki Nakahara, a regular dissenter from the board's decisions, resigned on March 31 as his four-year term ended, along with board member Toshio Miki. They were replaced by Hidehiko Haru, former vice president of Tokyo Electric Power Co., and Toshikatsu Fukuma, a former adviser to Mitsui & Co. Economic and Fiscal Policy Minister Heizo Takenaka, who has urged the bank to ease policy further, attended today's meeting without voting.