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The Bank of Japan sees a more volatile recovery path ahead as rising waves of the coronavirus abroad cloud the recovery outlook and spark renewed nerves in markets.

The BOJ cut its growth forecast for the current year while keeping its key interest rates and asset purchases unchanged, according to a statement from the central bank Thursday. Amid the heightened uncertainty over the outlook the central bank said it was ready to take further action if needed. All but one of 43 surveyed economists forecast a stand-pat decision.

The bank now sees the economy shrinking 5.5% in the year to March from a 4.7% drop forecast previously, citing a delayed recovery in the services sector. It raised its growth projection for the following year to 3.6%, suggesting a wider gap between recession and recovery.

The decision and forecast changes come with the risks for Japan’s export-reliant economy increasing as the virus surges again in the U.S. and Europe. A return to partial lockdowns in some parts of Europe and the prospect of an even more prolonged pandemic are helping fuel stock market falls and further yen gains.

​The yen this week strengthened to a five-week high against the greenback amid concern over the impact of the worsening pandemic on global economic activity. The 225-issue Nikkei average was down around 0.3% on Thursday afternoon, with the improved growth forecast for next year possibly helping support sentiment.

The decision to hold policy despite the heightened uncertainty likely reflects continued signs of a recovery in Japan from its record contraction as production and exports improve. The central bank also has little extra fire power to stimulate the economy, with an extension of its existing virus-response measures seen by many economists as its most likely next move.

​The BOJ’s ramped-up asset buying has helped keep markets relatively stable while around ¥110 trillion in loan programs has ensured struggling firms can access credit rather than going bust. The measures are currently set to expire at the end of March, having already been extended by six months.

“I’m not sure if the BOJ really needed to cut its 2020 GDP forecast this much. Monthly data suggest growth won’t be terrible from here,” said Yoshimasa Maruyama, economist at SMBC Nikko Securities. An extension of the lending programs will be the likely focus of any further moves, he said.

“A deeper negative rate is out of the question when the financial system is hurting more during a slump,” he added.

“While the reflation effort is on the back burner for now, the central bank continues to face serious challenges, with the economy still struggling from the virus impact and recent readings on core inflation below zero,” Bloomberg economist Yuki Masujima said.

While Japan has had far fewer virus cases than many other developed countries, the surge in Europe and the U.S. casts a shadow over the outlook, despite the relative success of policy makers in propping up the economy. The number of bankruptcies is actually down from last year and the jobless rate has remained low at 3% for now.

On inflation, the bank trimmed its forecast for this fiscal year, citing the impact of government-sponsored discounts on travel packages to help regional economies and the tourism industry.

Inflation is running far below the BOJ’s 2% target, but the bank’s priorities now are keeping credit lines open to companies and maintaining market stability. The BOJ said the government’s travel subsidies was a factor behind the lowering of its price forecast for this fiscal year, citing a likely 0.2 percentage point downward impact on this year’s inflation data.

“What’s missing here is a discussion over how they are going to achieve the price target,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG and a former BOJ official. He also flagged the possibility of trouble ahead if the yen continues to appreciate given the BOJ’s lack of additional policy tools.

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