By Stanley White and Hideyuki Sano
TOKYO (Reuters) - The Bank of Japan signalled on Friday that the worst of the global crisis may be over for the world's second-largest economy, which shrank at a record pace in the first three months of the year.
The central bank upgraded its view on the ailing economy for the first time in almost three years while keeping interest rates on hold, noting that steep declines in exports and output were levelling out.
"The pace of deterioration in the Japanese economy will likely moderate and the economy will likely stop deteriorating," the BOJ said in a statement at the end of a two-day policy meeting. In recent months, it had said the economy was deteriorating sharply.
"Financial conditions remain severe, although tensions have eased."
The BOJ moves, which had been widely expected, echoed more upbeat assessments of the recession-hit global economy by a chorus of other policymakers around the world in recent weeks who are pinning their hopes on tentative signs of recovery.
The central bank did not update its numerical forecasts for growth or other key indicators, or mention if its less bearish outlook had effected its views on whether it should buy more Japanese government bonds (JGBs), which would push more money into the economy to spur growth.
But it did say it would expand the range of collateral it takes for its market operations to include U.S., UK, German and French sovereign debt, indicating it was still concerned about Japanese banks' ability to raise funds as financial conditions remained tight.
To keep credit flowing and save jobs, the Japanese government plans to set up a lending scheme worth up to 4 trillion yen to encourage banks to lend to large and medium-sized companies, the Nikkei business daily reported on Friday before the BOJ announcement.
BOJ Governor Masaaki Shirakawa will hold a news conference later in the day, with his comments expected after 0715 GMT (8:15 a.m. British time).
The BOJ's decision had little impact on dollar/yen, which was trading at 94.19 yen. JGB futures were down 0.24 point at 136.77, while Tokyo stocks <.N225> were down 0.6 percent.
"I think the BOJ has got their view right on the economy, as we're seeing signs of reaching a bottom," said Seiji Adachi, senior economist at Deutsche Securities in Tokyo.
"There's some speculation that the BOJ may go for quantitative easing and purchase more JGBs, but money supply is already increasing, and the BOJ is unlikely to go that far. For the time being, the BOJ will keep rates on hold."
Since last October, the BOJ has been buying risky assets such as company bonds to ease tension in markets. It has also decided to buy shares from banks to reduce banks' exposure to stock market fluctuations.
Still, analysts say there is little immediate need for central banks globally to expand the collateral they accept because strains in money markets have eased considerably.
Data this week showed Japan's economy shrank 4.0 percent in January-March, as a plunge in demand for Japanese-made cars and flat-screen TVs prompted firms to slash capital spending, damping the domestic economy.
In the past few months, some signs have emerged that the global economy is stabilising, but it is far from clear when it will begin growing again or how strong any recovery will be.
The BOJ said last month in its twice-yearly economic outlook report that the Japanese economy would slowly recover later in the year in line with an expected pickup in the global economy.
While BOJ officials have been relieved that the freefall in output is subsiding, policymakers remain cautious over whether the recovery will be sustainable.
Shirakawa said on Wednesday that the uptick was mainly due to companies replenishing depleted inventors, rather than a sustained recovery in consumer spending, which is key to turning the global economy around.
Recent strength in the yen, taking it to a two-month high against the dollar, has added to concerns that exports will remain under pressure, but Japanese Finance Minister Kaoru Yosano said on Friday that Japan was not considering intervening in currency markets right now.
(Writing by Kim Coghill; Editing by Neil Fullick)