TOKYO - 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.

After a two-day policy meeting, the central bank said it had upgraded its view on the ailing economy, saying conditions were still deteriorating but noting that steep declines in exports and output appeared to be levelling out.

While BOJ officials have been relieved that the freefall in output is subsiding, they remained cautious over whether the recovery will be sustainable. Masaaki Shirakawa, the bank's governor, 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. ... more

Such an upgrade by the BOJ could indicate that it may pause in expanding the range of unconventional policy steps it is considering to revive the economy, such as buying of corporate debt. But it could face pressure to do so again if the economy does not recover as it hopes.

The BOJ board also voted unanimously to keep its overnight call rate unchanged at 0.10 percent.

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.

The BOJ said on Friday it would accept U.S., UK, German and French sovereign debt as collateral it takes for its market operations, which would give banks more flexibility in fund raising.

Still, analysts say there is little immediate need for central banks to expand the collateral they accept because strains in global money markets have eased considerably.

Highlighting the woes Japan is facing, data showed this week that the economy shrank 4.0 percent in January-March, as a plunge in demand for Japanese-made cars and flat-screen TVs prompted firms to stop capital spending.

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. -- REUTERS