The nation's financial system remains vulnerable to slumping stock prices, the Bank of Japan said in its monthly assessment of the economy released Thursday.
While keeping its overall assessment on the current state of the economy unchanged for the second consecutive month, the BOJ listed increased risk factors that could harm the outlook.
Concern for the frailty of the nation's banks led the BOJ to announce the day before that it plans to purchase bank shareholdings directly, giving a boost to Tokyo stocks in Thursday's trading.
On the Tokyo Stock Exchange, the key Nikkei average advanced more than 400 points in the morning thanks to active buying of bank issues, although the index pared the gains in the afternoon to close at 9,669.62, up 197.56 points from Wednesday.
"The recent weakness in domestic stock prices and its potential adverse effect on the financial system and the economy should be monitored carefully," the BOJ said in its report.
It pointed to growing uncertainty in exports, one of the few strong points in the economy, amid worldwide dips in stock prices. The BOJ further alluded to uncertain outlooks in information technology-related industries, geopolitical factors and recent surges in oil prices.
The economy, "despite persistent weakness in domestic demand and large uncertainty regarding the global economy, has almost stabilized as a whole," thanks to growing exports and industrial production, the BOJ said.
But a distinct recovery in the immediate future remains elusive, due to growing uncertainty in the global economy and a legacy of debt that continues to pull the domestic economy back.
"It will take a while for the economy to show clear signs of recovery, as the pace of increase in exports and production is expected to slow temporarily while restraining forces such as excessive labor input and debt persist," the BOJ said.