The Bank of Japan kept monetary policy on hold and gave a brighter assessment of the economy on Tuesday, encouraged by a rebound in factory output and increasing signs that the recovery from the devastating March earthquake is broadening. But the central bank warned that emerging nations faced a tough balancing act between curbing inflation and sustaining economic growth.

It also reiterated that U.S. balance sheet adjustments and Europe’s debt woes were among risks to Japan’s economic outlook, in light of a series of weak U.S. economic data, which increased concerns that exports may get less support from global demand just when Japan is overcoming supply chain problems from the March 11 earthquake and tsunami.

As widely expected, the Bank of Japan kept its benchmark interest rate steady at a range of zero to 0.1 percent by a unanimous vote and held off on loosening monetary policy further. 

“Japan’s economy is picking up as supply constraints from the earthquake ease,” the central bank said in a statement issued after the rate decision. The Bank of Japan cut its economic forecast for the current fiscal year in a quarterly review of its growth projections, although this was a technical revision reflecting a steep contraction in first-quarter GDP. It kept its projection for the following year unchanged.

Japan’s economy is likely to have contracted for three straight quarters through June but is expected to grow 1.0 percent in the third quarter, a Reuters poll showed, as companies make progress restoring supply chains hit by the March disaster.

Factory output jumped by the most in almost 60 years in May while business and consumer sentiment showed signs of recovery from the quake’s damage, underscoring the Bank of Japan’s view that the economy will resume a moderate recovery in the autumn. The central bank was more optimistic in its assessment of the economy compared to its remarks last month, when it had said that while the economy appeared to be picking up, it remained under pressure. 

On Tuesday, the central bank was also more upbeat about exports and domestic demand, saying they were improving. That brighter view reinforces investors’ expectations that no immediate monetary easing is on the horizon. “As recent economic data has shown an improvement, it is natural that the BOJ raised its view on the economy,” said Kyohei Morita, chief economist at Barclays Capital Japan.

“As long as the BOJ maintains its GDP forecast for fiscal 2012-13 as its main scenario, it is unlikely to implement additional easing steps.” The Bank of Japan cut its economic forecast for the current fiscal year to 0.4 percent from the 0.6 percent projected three months ago. 

It maintained its 2.9 percent growth forecast for the following fiscal year, as well as the 0.7 percent core consumer inflation projection for both years. The central bank’s statement did not include a warning that it was focusing on downside risks to the economy — a sign that it is less concerned about Japan’s near-term economic prospects.

The Bank of Japan’s governor, Masaaki Shirakawa, said Tuesday that global economic growth was easing somewhat. But he said there was no change to the central bank’s view that the global economy will be the key driver of Japan’s growth once supply constraints ease. “We are mindful of various risks to Japan’s economy, both at home and from abroad,” Mr. Shirakawa said at a news conference.

Some in the Bank of Japan have become increasingly worried about softening global growth. U.S. jobs growth ground to a near halt in June, dashing hopes that the world’s largest economy was emerging from a soft patch, while annual inflation in China accelerated to a three-year high, signaling that more monetary tightening may be needed in the second-largest economy even as economic growth slows. 

The central bank issues its long-term economic and price forecasts in April and October of each year, and reviews them in January and July.

The Bank of Japan has stood pat on monetary policy since easing credit just days after the earthquake by topping up a pool of funds to buy assets ranging from government bonds to corporate debt. It has expressed its readiness to ease policy further if the damage from the quake proves to be bigger than expected, although recent upbeat economic data has reduced expectations of imminent central bank action. (Reuters)