Central bank raises outlook for first time in almost three years The Bank of Japan acknowledged Friday for the first time in almost three years that there are signs of improvement in the economy. "Economic conditions have been deteriorating, but exports and production are beginning to level out against the backdrop of progress in inventory adjustments, both at home and abroad," the central bank said at the conclusion of its two-day policy meeting. It added that government spending is set to increase, providing a further boost. "The pace of deterioration in economic conditions is likely to moderate gradually, leading to a leveling out of the economy," it said, marking a change from the Bank of Japan's previous gloomy assessments of continuing deterioration. In late April, the Bank of Japan had reduced its expectations for economic growth in fiscal year 2009, but also said it expected overseas economies to start recovering the latter half of the fiscal year. See story on previous Japanese economic outlook. A bold move Glenn Maguire, chief Asia economist at Societe Generale, said the move to "rather boldly" upgrade the economic assessment was shocking at first, but "it does make perfect sense." "Demand from China is coming on line, demand for autos in a number of economies is now starting to turn up, and the yen is more competitively priced," he said. In addition to predicting the start of a recovery, the bank's board members also said the rate of decline in prices will moderate from the latter half of fiscal 2009, supported partly by measures to stabilize the financial system and a turnaround in overseas economies. And if these developments continue, "there are prospects for Japan's economy to return to a sustainable growth path with price stability in the longer run," they said. However, they warned of "downside risks to the economy stemming from future developments in the global financial and economic situation, changes in medium- to long-term growth expectations and financial conditions in Japan." Following Friday's central bank announcements, the yen continued to strengthen against the U.S. dollar, with the greenback buying 94.15 yen vs. 94.58 a day earlier. Will take Treasurys, gilts The central bank also said it will now accept foreign sovereign debt from the U.S., U.K., Germany and France as collateral for its funding operations, in a move to provide liquidity and help insure the stability of the financial markets. Step by step, the bank has expanded the range of eligible collateral since last autumn. The latest move follows a study of the feasibility of accepting the so-called cross-border collateral. With interest rates already near zero, the central bank has recently focused on quantitative easing measures, such as the purchase of corporate debt and widening the range of assets that it accepts as collateral. See story on Bank of Japan's April 6-7 meeting. The bank "also surprised with a decision to accept U.S., U.K., German and French government debt as eligible collateral in open market operations," said Maguire called the move a surprsie, saying "Japan's banks can now effectively swap anything with the Bank of Japan for cash." Steady rate The Bank of Japan's policy board members also kept their benchmark policy rate unchanged at 0.1%, as widely expected. The Bank of Japan last cut its overnight lending rate in December, easing to 0.1% from the previous rate of 0.3%. See story from December meeting. The central bank's latest policy meeting started Thursday in Tokyo, a day after official data showed that the nation's gross domestic product shrank at a record annualized pace of 15.2% in the first quarter from the previous three months, but the data weren't as bad as the market expected.

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