The Bank of Japan (BOJ) maintained its target for the monetary base and asset purchases but said "Japan's economy is starting to recover moderately"and "is expected to recover moderately on the back of the resilience in domestic demand and the pick-up in overseas economies."
"The year-on-year rate of change in the CPI is likely to turn positive," the BOJ added, though it slightly revised downwards its latest forecasts for growth and inflation.
The BOJ, which embarked on a new aggressive phase of monetary easing on April 4, has become increasingly confident about the economy and it was the first time in over two years that Japan's central bank had used the word "recover" to describe the country's economy.
In June it had said that the economy was "picking up" and in May it said the economy had "started picking up."
However, the BOJ also admitted there was a high degree of uncertainty over the economy stemming from the prospects from Europe's debt problem, developments in emerging and commodity-exporting economies and the pace of U.S. economic recovery.
But exports from Japan have stopped decreasing as overseas economies are gradually heading toward a pick-up, the BOJ said, adding business fixed investment appears to have stopped weakening, public investment is rising and housing investment has generally improved.
"Reflecting these developments in demand both at home and abroad, industrial production has stopped decreasing and signs of picking up have become increasingly evident," the BOJ said, adding inflation remains negative through "some indicators suggest a rise in inflation expectations."
But the BOJ also said that it would continue with its easy policy stance to help the economy overcome nearly 15 years of deflation.
"The Bank will continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner," the BOJ said, repeating its statement from recent months.
The BOJ also confirmed its target for boosting the monetary base by an annual pace of 60-70 trillion yen.
The BOJ will also purchase Japanese government bonds so their amount outstanding rises at an annual pace of about 50 trillion yen, buy exchange-traded funds and real estate investment trusts so the amounts outstanding rise by an annual pace of 1.0 trillion, and 30 billion yen, respectively, and continue to buy commercial paper and corporate bonds until the amounts outstanding reach 2.2 trillion and 3.2 trillion, respectively, by end-2013.
In its latest forecast, a majority of BOJ policy board members see real Gross Domestic Product up by 2.8 percent in the current fiscal 2013 year, which began on May 1, slightly down from the April forecast of 2.9 percent. In fiscal 2014 growth is forecast at 1.3 percent, down from April's 1.4 percent, and in 2015 growth is seen at 1.5 percent, down from 1.6 percent.
In the first quarter of this year, Japan's GDP rose by 1.0 percent from the fourth quarter for annual growth of 0.4 percent, steady from the fourth quarter growth rate.
In May, Japan's inflation rate remained negative at 0.3 percent but was up from April's 0.7 percent drop and March's 0.9 percent deflation rate.
Consumer price inflation in the current fiscal year is forecast at 0.6 percent, slightly down from April's forecast of 0.7 percent, while inflation is forecast to pick up to 1.3 percent in fiscal 2014 - excluding the effects of planned consumption tax hikes - down from April's 1.4 percent. In fiscal 2015 inflation is seen hitting 1.9 percent, unchanged from April.
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