TOKYO (AFP) - Japan's central bank said on Wednesday the world's number two economy has begun to recover, but it kept markets guessing on when it will wind down emergency measures aimed at fighting the credit crunch.
Recovery hopes also got a boost from a report showing that Japan's consumer confidence rose for a ninth straight month, hitting the highest level in almost two years, the government said.
The government's consumer confidence index increased 0.4 points in September from the previous month, to 40.5 -- the highest since October 2007.
Deflationary pressures also appeared to ease as wholesale prices rose 0.1 percent in September from the previous month.
Japan's economy "has started to pick up," the Bank of Japan said as it left its key interest rate on hold at 0.1 percent, as widely expected.
It gave no indication of whether it would extend its scheme, due to expire at the end of the year, to buy corporate debt. BoJ governor Masaaki Shirakawa said a decision would be made at the next meeting on October 30.
"The BoJ will keep supporting the economy by maintaining an extremely loose monetary policy with the current super-low interest rate," he said.
The situation facing small companies "remains severe" despite an overall improvement in corporate financing, he told a news conference.
Analysts expect some of the BoJ's extraordinary steps to be wound down soon as the worst of the credit crunch appears to have passed and the economy returned to positive growth in April-June, exiting a year-long recession.
"The Bank will follow through with plans to terminate commercial paper and bond purchasing operations at end December," predicted Barclays Capital economist Kyohei Morita.
"These operations, which were extended once from a deadline of end-September, have continued to go sharply under-subscribed in recent months."
The Bank was more optimistic about the outlook than it was last month, when it had said Asia's biggest economy was "showing signs of recovery."
But even so analysts said an interest rate rise looks unlikely any time soon in Japan, where borrowing costs have been kept very low for years to support a sluggish economy.
"We believe the BoJ will hold the policy rate unchanged at 0.1 percent (for the) rest of 2009 and much of 2010," said Calyon economist Susumu Kato.
The Bank will be anxious not to repeat its blunder of August 2000, when it raised interest rates too soon and was later forced to reverse the decision as the economy started to worsen again.
Japan's Financial Services Minister Shizuka Kamei has accused the BoJ of "talking in its sleep" with its remarks suggesting that the emergency measures may be withdrawn.
But Shirakawa said that the BoJ had been assured by the new centre-left government that it would respect the central bank's independence.
The Bank noted that government investment has been rising, along with exports and factory production.
"Business sentiment, especially at large manufacturing firms, is showing some improvement. The decline in business fixed investment, which mainly reflects weak corporate profits, has been moderating," it added.
Kamei said Wednesday the government should be ready to inject public funds into struggling banks if needed and also to take steps to boost domestic demand through fiscal spending.
