The Bank of Japan raised its assessment of the economy on Tuesday to say it is gradually emerging from a slowdown, further signaling that no imminent monetary easing is on the horizon.

A rebound in exports and output, driven by robust demand in fast-growing Asia, has underscored the central bank's view that the economy is heading toward a moderate recovery after a mild contraction in the final quarter of last year.

BOJ policymakers thus saw no imminent need to ease policy further and, as widely expected, kept interest rates on hold at a range of zero to 0.1 percent.

Japan's economy is gradually emerging from the current deceleration phase, the bank said after the rate review, tracing the government's assessment and roughly in line with the dominant market view on the current state of the economy.

It's wrong to say there is no change in the economy from last month to this month. There are positive signs from other data, from the global economy and from equity markets, said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo.

OVERTAKEN BY CHINA

Japan's economy shrank slightly in the October-December quarter and lost its place as the world's second-largest economy to China last year.

But a rise in shipments to China has bolstered Japan's exports, convincing many in the BOJ that the economy will perform as forecast with the resumption of a moderate recovery toward the middle of this year.

Japan's economy is making steady progress toward achieving our forecast made in January, BOJ Governor Masaaki Shirakawa told a news conference after the rate decision.

Better prospects for the global economy have boosted investors' appetite for risk and helped Japanese government bond yields extend gains this year, with the benchmark 10-year yield touching a 10-month high of 1.350 percent last week. It traded around 1.300 percent on Tuesday.

Japanese shares, up more than 5 percent since the start of the year, are among Asia's best performers, as traders see exporters' stocks as undervalued and investors shift funds into developed markets from emerging ones.

Shirakawa said rising bond yields, while partly reflecting market optimism over the global economic outlook, needed to be closely monitored as they could hurt the economy by raising corporate and household borrowing costs.

In a sign of its optimism, the BOJ upgraded its assessment on exports and output to say they were showing signs of resuming an uptrend on accelerating growth in the global economy, compared with the assessment last month when it said exports were somewhat weak and output was declining.

Revised industrial output data on Tuesday showed a 3.3 percent rise in December, the biggest monthly gain since last January.

But the central bank reiterated it would maintain its ultra-easy policy, under which it pledges to keep rates virtually at zero for several years until an end to deflation is in sight.

The upgrade in the economic assessment won't lead to a change in the BOJ's policy stance anytime soon as it comes in line with the bank's scenario that the economy will emerge from a lull soon, said Seiji Shiraishi, chief economist at HSBC Securities Japan.

COMMODITY SPIKE MAY HURT

Inflationary pressure from rising commodity costs is a far less immediate problem for the BOJ, which is battling deflation, than for some of the bank's counterparts in Asia and Europe.

While data released in China on Tuesday showed inflation was lower than expected at 4.9 percent in the year to January, price pressures continued to build and could force the central bank to stick to its course of monetary tightening.

Rising raw material costs, which boosted Japan's annual wholesale inflation to a two-year high in January, could also become a headache for the BOJ.

While the higher costs may eventually push up consumer prices and ease deflationary pressures, they will squeeze corporate profits as weak domestic demand makes it hard for companies to pass on rising costs to consumers.

Shirakawa said the rise in commodity costs could erode Japan's purchasing power, though not enough to seriously harm growth.

The yen's rise has offset somewhat the worsening terms of trade for Japan, Shirakawa said. There is no need now to change our forecast of a moderate economic recovery.

The BOJ expects Japan to achieve core consumer inflation of 0.3 percent in the year beginning in April and 0.6 percent in the following year.

The BOJ cut interest rates effectively to zero last year and set up a 5 trillion yen ($60 billion) pool of funds to buy assets ranging from government bonds to private debt, aiming to support a fragile economy and pull Japan out of deflation.

BOJ officials have said topping up the asset buying plan is a clear option if downside risks to growth materialize, although expectations of an imminent monetary easing have diminished on growing signs that Japan's economy will soon emerge from a lull.

($1=83.41 Yen)

(Additional reporting by Kaori Kaneko, Tetsushi Kajimoto and Rie Ishiguro; Editing by Edmund Klamann)

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