The Bank of Japan signalled on Friday that the worst of the global crisis may be over for the world's second-largest economy, which shrank at a record pace in the first three months of the year.
The central bank upgraded its view on the economy for the first time in almost three years while keeping interest rates on hold, noting that steep declines in exports and output were levelling out.
"There have been expressions like free-falling or cliff-diving. We are no longer in that sort of situation," BOJ Governor Masaaki Shirakawa told a news conference after a two-day policy meeting.
"The economy has been moving in line with the projection we made in the outlook report" in April, Shirakawa said. That report predicted the Japanese economy would slowly recover later in the year in line with an expected pickup in the global economy.
Shirakawa said gross domestic product (GDP) would improve sharply in the second quarter, but did not elaborate. Economists predict only marginal growth at best for the current quarter if global demand for Japanese exports starts to recover.
The BOJ moves, which had been widely expected, echoed more upbeat assessments of the recession-hit global economy by a chorus of other policymakers around the world in recent weeks who are pinning their hopes on tentative signs of recovery.
Analysts said the BOJ may now pause from further policy moves as it waits to see if a rebound is really taking hold. The BOJ cut interest rates twice last year to 0.1 percent and has moved to buy corporate bonds and more government bonds as Japan's export-driven economy reeled from the plunge in global demand.
"Shirakawa is also highlighting that there's a lot of uncertainty about the future, so we can't expect the upgrade to lead to monetary policy tightening," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.
"At the same time, hurdles for further easing are now higher, so the BOJ will maintain its current policy for some time."
The central bank did not update its numerical forecasts for growth or other key indicators, or mention if its less bearish outlook had affected its views on whether it should buy more Japanese government bonds (JGBs), which would push more money into the economy to spur growth.
But it did say it would expand the range of collateral it takes for its market operations to include U.S., UK, German and French sovereign debt, indicating it was still concerned about Japanese banks' ability to raise funds as credit markets remain tight.
"Accepting foreign bonds as collateral is a way to refrain from buying more Japanese government bonds. There's some speculation that the BOJ may go for quantitative easing and purchase more JGBs, but money supply is already increasing, and the BOJ is unlikely to go that far," said Seiji Adachi, senior economist at Deutsche Securities in Tokyo.
The BOJ's decision had little impact on dollar/yen <JPY=>, which was trading at 94.19 yen, or JGB futures which eased 0.24 point at 136.77. Tokyo stocks <.N225> ended down 0.4 percent in line with global market weakness.
LONG AND WINDING ROAD
Since last October, the BOJ has been buying riskier assets such as company bonds to ease tensions in markets. It has also decided to buy shares from banks to reduce banks' exposure to stock market fluctuations.
Still, analysts say there is little immediate need for central banks globally to expand the collateral they accept because strains in money markets have eased considerably.
To keep credit flowing and save jobs, the Japanese government plans to set up a scheme worth up to 4 trillion yen to encourage banks to lend to large and medium-sized companies, the Nikkei business daily reported on Friday before the BOJ announcement.
Highlighting Japan's uphill battle, data this week showed the economy shrank 4.0 percent in January-March as a plunge in demand for Japanese goods from cars to flat-screen TVs prompted firms to slash capital spending, damping the domestic economy.
In the past few months, some signs have emerged that the global economy is stabilising, but it is far from clear when it will begin growing again or how strong any recovery will be.
For a graphic of Japan's export and output trends, click: http://graphics.thomsonreuters.com/059/JP_BOJ10509.jpg
While BOJ officials have been relieved that the plunge in exports and output is subsiding, policymakers remain cautious over whether the recovery will be sustainable.
Shirakawa said on Wednesday that the uptick was mainly due to companies replenishing depleted inventors, rather than a sustained recovery in consumer spending, which is key to a global economic recovery.
