The Bank of Japan upgraded its assessment of the economy for the first time in three years on Friday, saying a rebound in global demand could mean the record contraction last quarter was the worst of the recession.
The BOJ also said it would start accepting foreign bonds as collateral for loans to ease strains on the banking system, but analysts said its more upbeat tone on the economy suggested it may put any plans to return to full quantitative easing on hold.
The bank kept interest rates on hold at 0.1 percent, having cut it twice since the collapse of Lehman Brothers in September triggered a financial firestorm that pushed the global economy into meltdown.
"There have been expressions like free-falling or cliff-diving. We are no longer in that sort of situation," BOJ Governor Masaaki Shirakawa said 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 told a news conference.
That report predicted the world's second-largest economy would slowly recover later in 2009 amid 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 polled by Reuters last week predicted growth of 0.1 percent for the current quarter if global demand for Japanese exports starts to improve.
In the past few months, some signs have emerged that the global economy is stabilising, with steep declines in Japanese exports leveling out and industrial output rising 1.6 percent, the first gain in six months.
Shirakawa said the recent uptick in demand was mainly due to companies replenishing depleted inventories, and it was too early to tell if there would be a sustained recovery in consumer spending, which is essential for a global recovery.
"The key is how strong final demand will be after inventory adjustments are over. But there is a lot of uncertainty over this point. So we will carefully watch downside risks," he said.
"Thus, we think consumption and capital spending will be weak for the time being."
