The more optimistic view was a result of the higher factory orders
The Bank of Japan (BOJ) has said the Japanese economy has begun to stop deteriorating, but it has still kept interest rates unchanged at 0.1%.
The assessment was more optimistic than at last month's meeting, when it said the economy was continuing to worsen.
It made no change to policies such as buying corporate bonds, the current programme of which ends in September.
The improved view of the economy had been expected given the recent rises in factory output.
Conditions 'still terrible'
"We may be seeing a return to growth in Japan later this year so it is reasonable for the BOJ to upgrade its assessment now," said Shane Oliver, chief economist at AMP Capital Investors in Sydney.
"However, conditions are still terrible. Japan and other economies are still in the midst of a severe recession."
The key question is what will happen to the central bank's programme of buying bonds later in the year.
In common with many other central banks, the BOJ has been buying corporate bonds as part of a programme of quantitative easing, to get more money flowing through the economy.
"As for measures on credit markets, the issuance of corporate bonds is rising and the bank may start scaling back those steps if conditions allows after September," said Junko Nishioka, chief economist at RBS Securities in Tokyo.
But he warned that "although there has been some optimism on the economy after strong industrial output data, the BOJ is maintaining a very pessimistic view".
"It said the economy has begun to stop worsening, but it didn't say it has stopped worsening."