The upbeat assessment comes just days after government showed the economy had shrunk by four per cent in the first quarter of the year, its fastest pace in more than 50 years.

'Levelling out'

"The pace of deterioration in economic conditions is likely to moderate gradually, leading to a levelling out of the economy," the BOJ announced at the end of a two-day policy meeting.

"Financial conditions remain severe, although tensions have eased."

Japanese exporters have been hit particularly hard by the current global recession because they produce big ticket items such as cars and televisions that are typically bought on credit by consumers in developed nations.

The government is banking on massive spending packages to spark a turnaround.

The latest $150bn stimulus package announced by Taro Aso, the Japanese prime minister, includes incentives to buy energy-efficient appliances and cars, plus help for the unemployed and small businesses.

Before the central bank announcement on Friday, the Nikkei business daily said the government planned to keep credit flowing and save jobs by setting up a lending scheme worth up to four trillion yen to encourage lending to large- and medium-sized companies.

In the past few months, some signs have emerged that the global economy is stabilising but it remains unclear when it will begin growing again or how strong any recovery will be.