The Bank of Japan today upgraded its view of the economy for the first time in nine months on accelerating global growth but kept its easy monetary policy in place due to persistent deflation.
The central bank's board voted unanimously at the end of a two-day meeting to keep its key rate unchanged between zero and 0.1%.
The bank's decision to do so comes as it weighs the impact of a monetary easing programme that includes a five trillion yen ($60 billion) asset purchase scheme to boost liquidity.
'Japan's economy is gradually emerging from the current deceleration phase,' the Bank of Japan said in a statement, noting that Japanese exports and production are picking up thanks to global growth led by emerging markets.
The wording reflected the central bank's more upbeat view compared to previous references to a 'pausing' recovery and marked the first time it has raised its assessment since May.
'As the growth rate of the global economy has started increasing again led by emerging and commodity-exporting economies, Japan's exports and production are showing signs of resuming an uptrend,' the statement said.
Some analysts warn that Japan's reliance on external trade leaves it exposed to the strength of the yen, which reduces the competitiveness of its exports while making imports cheaper, encouraging deflation.
Japan's real gross domestic product slipped by an annualised 1.1% in the October-December quarter as the expiration of car subsidies hit car sales, a new tobacco tax sapped cigarette demand and a surging yen hurt exports.
But the contraction was smaller than expected, and there are hopes that the economy will pick up again in the current quarter on stronger export growth amid demand from key partners such as China, which overtook Japan in 2010 to become the world's second-biggest economy.
Last month Japan's central bank raised its forecasts for the nation's growth this fiscal year. Companies such as Honda and Toyota saw their profits fall in the three months ended December, partly because of the decline in stimulus-driven domestic demand and a strong yen, but lifted full year profit expectations.
However, Japan remains mired in deflation. Falling prices prompt consumers to hold off on purchases in the expectation of further price drops, clouding future corporate investment.
The Bank of Japan has pledged to maintain its loose monetary policy 'in order for Japan to overcome deflation and return to a sustainable growth path with price stability,' or until consumer prices are seen to rise consistently.
The central bank has previously forecast that consumer prices would rise in the 2011 fiscal year that begins in April. It noted today that 'the year-on-year rate of decline in the CPI is expected to continue slowing.'
December's 0.4% slide in consumer prices marked the 22nd monthly fall in a row but also illustrated that the pace of decline was easing, lending support to the Bank of Japan's view that prices will rise in the coming months.
