TOKYO (AFP) ― The Bank of Japan said Tuesday the economy was “picking up” and held off ramping up April’s huge stimulus scheme, but warned of possible headwinds caused by uncertainty in Europe and the United States.

The announcement came a day after data showed the economy grew faster than expected in the first quarter of 2013 but sent the yen rallying and stocks tumbling as investors were left disappointed

“Japan’s economy has been picking up,” the bank said in a statement, adding that capital spending by the nation’s firms “appears to have stopped weakening on the whole.”

In April, new leadership at the BOJ ― handpicked by Prime Minister Shinzo Abe ― vowed to hit a planned two percent inflation target within two years, jack up asset purchases including government bonds, and double the money supply.

The ambitious inflation target ― a key part of Abe’s plan to stoke the deflation-plagued economy ― is aimed at reversing years of falling prices that have crimped private spending and business investment.

On Tuesday it repeated its determination to press on with the aggressive monetary easing for “as long as it is necessary.”

The announcement Tuesday comes after the Cabinet Office said Monday that revised data showed annualized growth came in at 4.1 percent in January-March, from a preliminary reading of 3.5 percent, suggesting Abe’s strategy of huge spending is bearing fruit.

Also, consumer confidence improved in May over the previous month with the number of Japanese who expect prices to rise sitting at a near five-year high.

However, policymakers said there was still a “high degree of uncertainty” caused by the debt troubles in key export market Europe as well as the “growth momentum of the U.S. economy as well as the emerging and commodity-exporting economies.”

The BOJ decision, which comes after the European Central Bank and Bank of England held steady after their policy meetings last week, sent investors running.

The dollar dived to 97.98 yen from 98.94 yen earlier in the day, which in turn sent the benchmark Nikkei 225 stock index tumbling more than one percent.

“The decision is likely to disappoint the market and fuel yen-buying sentiment,” said Takahiro Sekido, economist with the Bank of Tokyo-Mitsubishi UFJ. However, he added that “there is room for fresh measures at the next meeting.”

Some observers had expected the BOJ to extend the length of fixed-rate loans to banks to two years or more from the current one year so that the lenders would buy more Japanese government bonds, which have seen recent volatility.

Yields on Japanese bonds have jumped in recent weeks, stoking fears about Tokyo’s ability to finance its massive public debt, the worst in the industrialized world at more than twice the size of the economy.

“The logic is presumably that financial institutions would reinvest some of the proceeds of any additional borrowing from the central bank in JGBs, hence lowering their yields,” London-based Capital Economics said in a note.

Mixed U.S. economic data has fuelled speculation the U.S. Federal Reserve would hold off cutting back on its $85 billion-a-month bond-buying program, known was quantitative easing, that is aimed at stoking the world’s largest economy.

The International Monetary Fund has said it expects Japan’s economy to expand 1.6 percent in 2013.