The Bank of Japan kept monetary policy on hold and revised up its 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 that fueled concerns exports may get less support from global demand just when Japan is overcoming supply constraints.

As widely expected, the BOJ kept its benchmark interest rate steady at a range of zero to 0.1 percent by a unanimous vote and held off on loosening 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 BOJ 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 likely 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 BOJ's view that the economy will resume a moderate recovery in the autumn.

GLOBAL GROWTH WORRIES

The BOJ revised up its assessment of the economy from last month, when it had said that while the economy appeared to be picking up, it remained under downward pressure mainly on output.

That upbeat view reinforces market expectations that no immediate easing is in the horizon, although the BOJ is hardly optimistic about the outlook.

Still, some in the BOJ have become increasingly worried about softening global growth which, if prolonged, will hurt exports just when supply constraints ease in the autumn.

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 tightening may be needed in the second-largest economy even as 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 BOJ has stood pat on policy since easing credit just days after the March disaster by topping up a pool of funds used to buy assets ranging from government bonds to corporate debt.

(Editing by Edmund Klamann)

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