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TOKYO Reuters Japans Nikkei average pared gains to close near its days lows on Monday after rising more than 3 percent at one point, with investors disappointed by a Bank of Japan decision that contained no surprises and was seen as lackluster at best.

At an emergency meeting, the BOJ expanded its fund supply tool, saving more aggressive steps for when there is clearer evidence of a slowdown in a fragile economy hit by a strong yen.

But analysts questioned whether the central banks action would do much to help to stem a rise in the Japanese currency that hurts exports and may delay Japans exit from deflation, noting that most of the steps it took had already been widely expected.

"This is better than nothing, but still disappointing. Theres little content in this message," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities.

"Certainly theres some thinking that the BOJ wants to save its stronger measures for later, but if you look at what the yen and stock market have been doing lately I wonder if this is really such a good decision. Things are already tough."

In thin trade, the Nikkei ended up 1.8 percent or 158.20 points to 9,149.26. It rose more than 3 percent or as far as 9,280.70, roughly 300 points, on short-covering before the results of the BOJ meeting came out during the midday recess.

The broader Topix rose 1.2 percent to 829.21, also off earlier highs.

Despite the Nikkeis rise over the past two trading days, which has taken it up 2.7 percent, market players said sentiment remained fragile in the absence of bolder BOJ moves and that levels around 8,800 could be tested soon.

"Theres a lot of economic data coming out this week and next, particularly the U.S. non-farm payrolls figures on Friday, and I think the Nikkei might test lows again late this week or early next week," Yamagishi added.

Below 8,800, the next target is 8,697, a 61.8 percent retracement of the rally between the Nikkeis March 2009 low and April 2010 high.

The dollar hit a 15-year low of 83.58 yen last week, when the Nikkei fell to a 16-month low of 8,807.41. The greenback was trading at 85.15 yen by the afternoon, down 0.1 percent.

Tokyo shares got their initial upward impetus from gains made by U.S. stocks on Friday on strong buying interest at a key technical level and short-covering.

Also helping was a less gloomy revision for U.S. GDP than expected. Second-quarter gross domestic product growth was revised down to 1.6 percent, from 2.4 percent. Many economists had forecast an even bigger downward revision to 1.4 percent growth.

EXPORTERS, TRADERS

Exporters held onto gains, although they were off earlier highs.

Canon Inc rose 2.4 percent to 3,585 yen and Kyocera Corp climbed 2.6 percent to 7,440 yen. Honda Motor Co advanced 1.6 percent to 2,855 yen.

Amid broad-based buying, trading houses rose, with one analyst saying foreign investors were buying commodities-related shares during the morning session.

"Foreign investors seem to be buying commodity-related stocks such as trading houses because some have already started to expect to see more liquidity in markets due to speculation for monetary easing both in Japan and the United States," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.

Mitsubishi Corp rose 1.6 percent to 1,859 yen and Mitsui Co added 1.1 percent to 1,139 yen.

Kyowa Hakko Kirin rose 2.6 percent to 878 yen, continuing to extend gains after Mizuho Securities lifted its rating on the stock to "outperform" from "neutral" on August 26, saying the stock had fallen excessively despite a solid earnings outlook.

Some 1.55 billion shares changed hands on the Tokyo exchanges first section. Advancing stocks outnumbered declining ones by more than 9 to 1.

Reporting by Elaine Lies; Editing by Edwina Gibbs

TOKYO Reuters The Bank of Japan buckled under government pressure and eased monetary policy at an emergency meeting on Monday in an effort to curb a rise in the yen that is threatening a fragile economic recovery.

The yen bounced back to day highs after the central bank expanded a scheme supplying cheap fixed-rate loans to banks, a move seen by investors as a symbolic gesture that will do little to halt a climb in the currency that hurts exports and may prolong deflation.

"Todays move is not a bold move," said Simon Wong, regional economist at Standard Chartered Bank in Hong Kong. "If the yen continues to appreciate, say it appreciates beyond the 80 level, that could trigger more direct intervention at some point."

The decision follows weeks of efforts by Tokyos policymakers to talk down the yen, signaling the possibility of intervening in the market after the Japanese currency hit a 15-year high of 83.58 yen against the dollar last week.

The government had heightened pressure on the BOJ to do its part, but analysts said the ball would now be back in the governments court. "They dont really have any other policy tools they are prepared to use, so that might make it more necessary to have intervention if the yen goes," said Richard Jerram, chief economist at Macquarie Securities Japan Limited.

The central bank said that by increasing the volume and duration of funds made available to banks it aimed to lower money market interest rates -- something that in the past also helped ease the upward pressure on the yen.

Although Japanese nominal interest rates are at rock bottom, deflation has boosted real rates, deterring investment and driving up the yen as overseas investors seek real yields that are higher than those in other major economies.

PM KAN KEEN TO LOOK ACTIVE

Market players were disappointed that the BOJ had stopped short of more aggressive moves such as increasing Japanese government bond JGB purchases or cutting its overnight rate call target.

BOJ Governor Masaaki Shirakawa told a news conference that the current level of JGB buying was appropriate, but that the central bank would not rule out any policy options.

The yens rebound pulled the Nikkei share average off its peaks and helped Japanese government bond futures bounce back from an early plunge.

Prime Minister Naoto Kan, whose Democratic Party swept to power a year ago but was thrashed in a July upper house poll, is keen to show that he is doing something about the economy ahead of a challenge from powerbroker Ichiro Ozawa in a September 14 party leadership vote that could split the party.

Kan was to meet Shirakawa after the policy board meeting, and cabinet ministers were to decide the basic thrust of additional measures to help the slowing economy at a meeting later in the day.

"The governments fiscal policy and the BOJs monetary policy should be in sync to send a strong message," Trade Minister Masayuki Naoshima told reporters.

But Japans huge public debt, now twice the size of the economy, limits Tokyos options, and the government is expected to propose shifting funds around rather than announce new substantial spending.

FLYING SOLO?

Japan will likely need to intervene alone if it were to step in to curb yen gains, as its Group of Seven counterparts, happy with the benefits to exports from their weak currencies, are in no mood for coordinated intervention.

Solo currency intervention, however, will not have much effect in weakening the yen unless joined by aggressive monetary easing by the BOJ, traders say.

In Mondays move, the central bank increased the volume of money available to banks under its fixed-rate fund supply operation to 30 trillion yen $351 billion from 20 trillion yen.

It also put in place a six-month fund operation in addition to the three-month loan programme already in place.

Of the 30 trillion yen, 10 trillion yen will be the six-month fund operation, BOJ said. The decision was by an 8-1 vote, with board member Miyako Suda dissenting.

The central bank, as widely expected, maintained its overnight core rate target at 0.1 percent by a unanimous vote.

The BOJ launched the funding scheme, which offers loans at 0.1 percent, in December. That failed to boost bank lending but helped to push the yen further away from a November high.

The BOJ last eased monetary policy in March, when it doubled the size of the fixed-rate fund supply tool to 20 trillion yen.

$1=85.37 Yen

Writing by Leika Kihara and Linda Sieg; additional reporting by Tetsushi Kajimoto; Editing by Edmund Klamann and Tomasz Janowski