The Bank of Japan upgraded its assessment of the economy on Thursday after noting that public works spending is continuing to increase in conjunction with upticks in exports and production.
The central bank's eight-member Policy Board also voted unanimously to keep the key interest rate unchanged at around 0.1 percent.
Japan's economic conditions are showing signs of recovery," the central bank said in a statement, revising its assessment from last month, when it said economic conditions "have stopped worsening."
Public works spending is on the increase, and exports and production are also rising against a backdrop of progress in inventory adjustments both at home and abroad, and a recovery in overseas economies, especially emerging ones, the central bank said.
The BOJ repeated its expectation that the economy will start recovering in the latter half of this fiscal year.
Minoru Nogimori, an economist at the Nomura Securities Financial Economic Research Center, agreed with the BOJ's latest assessment.
"The upward revision is appropriate," Nogimori said. He also acknowledged that production and exports are improving.
But Nogimori had a different take on the outlook.
"The economy will start slowing from around the October-December period," he said. "Since it will take time for the U.S. and European economies to pick up, Japan's exports could slow," Nogimori said.
A possible reduction in this fiscal year's extra budget, to be made by the new administration, could put downward pressure on the economy, he said.
Payrolls and investments in plant and equipment will likely need to be slashed further, which will have some negative impact on the economy, Nogimori speculated.
To get the economy back on track, Nogimori said that the Hatoyama administration should implement economic measures when the economy worsens.