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Last Updated: Friday, 9 April, 2004, 12:55 GMT 13:55 UK
Japan economic outlook improves
Tokyo, Japan
Japanese consumers are feeling a bit better
The Japanese central bank has issued an upbeat report on the economy, lifting hopes of a sustainable recovery.

The Bank of Japan said on Friday the economy was improving "gradually," amid strengthening domestic demand and rising corporate profits.

The report is the latest in a series of signals that Japan may be emerging from a decade-long period of stagnation.

But the Bank said it was keeping interest rates on hold at zero in order to stimulate the economy.

It added that deflation - where falling prices curb consumer spending, slowing economic growth - had not yet been defeated.

"Consumer prices are projected to continue falling slightly on a year-on-year basis," the Bank said.

Exporters cheer

Japan's economic prospects have brightened in recent months, helped by a weak yen, which has triggered an export boom.

The Bank said the benefits of the export boom had begun to spill over into the wider economy.

"Exports have recently increased substantially, and business fixed investment continues its path of recovery," the Bank said.

The business climate in Japan has also been helped by efforts to tackle the mountain of bad debt weighing on the country's banks, much of it built up during the boom years of the 1980s.

But analysts warn that it is still too soon to draw a line under Japan's economic woes, pointing out that previous export-led growth spurts have fizzled out before recovery could take hold.

Many experts believe that stamping out deflation will be the acid test of Japan's latest tentative turnaround.

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