The Bank of Japan said it was growing slightly more optimistic about the economy and financial conditions, which will likely bring it a step closer towards phasing out some of its measures to support corporate funding.
But record deflation, rising job losses and weak capital spending may complicate the debate on the timing for exiting its special measures, which include buying commercial paper (CP) and corporate bonds from banks.
The central bank's policy board voted unanimously to keep interest rates on hold at 0.1% as widely expected.
'Financial conditions remain severe but are increasingly showing signs of improvement,' the Bank of Japan said in a statement.
Bank officials will scrutinise the bank's closely watched Tankan business confidence survey - due on October 1 - for clues on whether corporate sentiment and spending are improving at smaller firms as well as larger ones to help it decide when to phase out its unconventional steps.
The central bank may also be concerned about fiscal spending under the new administration of Prime Minister Yukio Hatoyama.
Central banks around the world have begun debating how and when to phase out their emergency steps to contain the damage wrought by the worst global financial crisis in decades, but most are not expected to do so until well into next year.
The Bank of Japan said exports and output were increasing thanks to a recovery in overseas markets, especially in emerging economies. It maintained its view on prices, saying annual core consumer price falls would narrow in the latter half of the year to March 2010.
The central bank is widely expected to keep rates at 0.1% until at least March 2011.
