Japan's central bank kept its key lending rate unchanged at 0.1% this morning, as expected, and raised its growth forecast for the current financial year to 2.6%.
'Japan's economy shows further signs of moderate recovery,' the Bank of Japan said. But it added that overcoming deflation and returning to sustainable growth remained a 'critical challenge'.
The bank has kept its key lending rate unchanged since December 2008, the peak of the global financial crisis, and lags behind other Asian economies that have recently tightened their monetary policies.
The central bank upgraded its growth projection from a previous forecast of 1.8% in April, as the world's second biggest economy benefits from strong exports on the back of fast growth in emerging economies.
The bank, however, slightly downgraded its GDP forecast for the 2011 financial year to 1.9% from a previous estimate of 2%.
The BoJ also upgraded its forecast for its core consumer price index (CPI) excluding fresh food for the year ending March 2011 to -0.4%, from an April forecast of -0.5%.
Japan has been stuck in a deflationary spiral since its asset bubble burst in the early 1990s, and consumer spending has never fully recovered. Japan fell into a severe recession following the global financial crisis but clawed out of it in the spring of 2009. Since then its recovery has gathered steam, with GDP reaching an annual rate of 5% in the first quarter of 2010.
