Long respected for piloting Japan back to economic health, Bank of Japan Gov. Toshihiko Fukui fended off calls to resign Thursday in a scandal threatening the central bank's delicate task of managing a long-awaited interest rate hike amid Japan's budding recovery.

Bank of Japan Gov. Toshihiko Fukui arrives to testify before a parliamentary budget committee in Tokyo Thursday, June 15, 2006. [AP]

Fukui told reporters he planned to stay at his position, despite being under fire since acknowledging he had invested 10 million yen (US$87,000£©several years ago in a fund operated by Yoshiaki Murakami, who was arrested last week for alleged insider trading.

"I apologize for the fuss surrounding my relationship with the Murakami fund," Fukui told reporters. But "I would like to complete my term in my current job."

Opposition leaders called for Fukui to step down, but Prime Minister Junichiro Koizumi was cited by Kyodo News agency as saying Fukui should continue at the post as long as his investment broke no rules at the central bank -- which the BOJ has confirmed.

Earlier in the day, the BOJ chief was called to testify before a parliamentary budget committee and said he didn't know Murakami had done something illegal when he decided to sell the investments in February this year, long after taking the helm of the central bank in 2003.

"When I withdrew my investment, I had no idea Murakami had violated the law," Fukui said.

The turmoil comes at an especially sensitive time for the embattled central bank, which is trying to coordinate a gradual increase of interest rates from zero without stifling the recovery of the world's second-largest economy. Earlier Thursday, the bank's board voted unanimously to keep interest rates unchanged.

Many analysts had expected the central bank to raise Japan's benchmark interest rate to 0.25 in July.

But the raging debate over Fukui could dent his credibility and cause the bank to hold off, said Yasunari Ueno, chief market economist at Mizuho Securities. The recent drop in Tokyo's stock market could also put a rate hike on hold, he said.

Other analysts said the assault against Fukui smacked of political grandstanding.

"I don't think anyone thinks in a serious fashion that the governor is going to be allowing his policy decisions to be determined by the status of his own finances," said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo.

He said the calls for Fukui's resignation are "going nowhere."

Fukui, whose five-year term ends March 2008, does not appear to have done anything wrong, but his investments raised ethics questions following the recent accusations against Murakami, Japan's most famous fund manager.

Fukui bought the funds as a private investment in 1999 when he was chairman of the Fujitsu Research Institute. But he didn't apply to sell the funds, however, until earlier this year. The sale came only months before Murakami's June 5 arrest. Murakami has admitted to engaging in insider trading and is currently in police detention.

The sale also raised questions because it came before the BOJ's landmark decision in March to end its super-easy monetary policy, a decision that could be seen as negative for Japan's investment climate.

The Bank of Japan requires its senior officers to report any investment sales, purchases or profits, but does not impel them to sell holding they already have, BOJ spokesman Takashi Yoshimura said. Officials are also asked to refrain from investments that raise the question of conflict of interest.

"As far as we understand, there is no violation of our internal rules," Yoshimura said.

The nationally circulated Asahi newspaper suggested it posed a conflict of interest, however, because Fukui had been controlling the interest rates that directly affect the economy and value of stocks or other investments in his portfolio. During that period, Fukui kept interest rates at zero, something credited with simultaneously supporting the economy and the stock market.

"It can be said that the central bank chief reaped gains from the super-loose monetary policy," the Asahi said in a commentary.

The suspicions was echoed by Tatsuo Hirano, a lawmaker of the opposition Democratic Party of Japan who grilled Fukui during the parliamentary hearing and repeated calls for him to step down.

"The BOJ governor has the ability to affect share prices through his influence on interest rates," Hirano said. "I don't believe it's appropriate that Mr. Fukui continue as governor of Japan."

Finance Minister Sadakazu Tanigaki conceded there was room for improving rules for investment by public officials.

"For example, regulations governing investments held by lawmakers do not mention investment funds," Tanigaki said. "I believe there's a need to debate these issues a little further."