The Bank of Japan upgraded its economic assessment today, as rising exports and output raise expectations the worst of the recession is over, but its cautious tone suggested it was in no hurry to end extraordinary policy measures.
The central bank said the outlook for the world's second largest economy was largely dependent on final demand, which remains weak as companies pass on the pain to households through job cuts.
The upgraded BOJ view was expected, given recent sharp rises in factory output, but analysts saw no sign yet the central bank is looking to end extraordinary policies such as buying corporate bonds and commercial paper to aid corporate financing.
"We may be seeing a return to growth in Japan later this year so it is reasonable for the BOJ to upgrade its assessment now. It does suggest that a further move toward aggressive quantitative easing is becoming more distant," said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors in Sydney.
"However, conditions are still terrible. It is too early for the BOJ to implement exit strategies. That is the general consensus among major central banks, because Japan and other economies are still in the midst of a severe recession."
The BOJ kept interest rates on hold at 0.1 per cent at its two-day policy review and held off on any new initiatives, as widely expected.
The recession, triggered by bank failures and market turmoil that followed defaults on US mortgages, has forced the BOJ and other major central banks to intervene in credit and interbank markets. There is now a global debate about when policy makers should retreat from these markets and cut stimulus spending.
For its part, the BOJ board may also discuss whether to extend its support for the corporate finance market. Central bank facilities to buy commercial paper and lend against corporate bonds expire in September.
The BOJ said in its statement that Japan's economy, after deteriorating significantly, had begun to stop worsening.
That was a slightly less pessimistic view than last month, when it said the economy continued to worsen.
The central bank was also more upbeat about the outlook, saying the economy is likely to show clearer evidence of levelling out in the coming months.
It was slightly more positive about Japan's financial conditions, saying that while they have generally remained tight, they were showing signs of improvement.
BOJ Governor Masaaki Shirakawa is due to hold a news conference later in the day and markets study closely his views on rising bond yields, which push up corporate borrowing costs and undermine capital spending, already sinking at a record pace in the first quarter.
Any sign that Shirakawa is concerned about the bond market could fuel speculation that the BOJ may expand purchases of Japanese government debt.
Reuters