The Bank of Japan said an economic recovery was underway as it kept monetary policy steady today.

The bank’s most optimistic outlook in two-and-half years was seen as reflecting the positive impact of a weakening yen and its massive monetary stimulus on activity.

The central bank made no major changes to its forecast that consumer inflation will accelerate in to near 2 per cent in the business year ending March 2016, a key target for prime minister Shinzo Abe’s drive to reflate the economy.

As widely expected, the BOJ voted unanimously to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60 to 70 trillion yen (€459-€536 billion).

“Japan’s economy is starting to recover moderately,” the central bank said in a statement after its two-day meeting, revising up its assessment for the seventh straight month. The last time the BOJ used the word “recover” to describe the economy was in January 2011, two months before the March 11th earthquake and tsunami that devastated the country.

Many central bank officials are encouraged by bright signs in the economy as the yen’s fall to multi-year lows supports exports and the feel-good mood generated by Mr Abe’s reflationary strategy bolsters consumer spending and business confidence.

The BOJ said capital expenditure had stopped weakening and was showing some signs of picking up, and also upgraded its view on factory output to say it was “increasing moderately”.

The BOJ's optimism suggests it will probably hold off on any additional stimulus at least until late October, when it overhauls its economic and price projections, analysts said. "There's no material change to the BOJ's forecasts from April. Basically, the economy is recovering in line with its main scenario," said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.

Reuters