But the central bank stuck to its view that the pickup in growth and a pullout from deflation will be slow and moderate, suggesting that its ultra-easy monetary policy will remain in place for years to come.

In his most upbeat assessment to date, BOJ Governor Masaaki Shirakawa said factors that had weighed on the export-reliant economy, such as the strong yen, pessimism over the U.S. economy and slowing overseas growth, were receding.

"It's hard to say with certainty that the timing will be in January-March but Japan's economy will gradually emerge from a slowdown," he told a news conference.

That roughly echoed the view by the BOJ's chief economist last week that Japan's economy would emerge from a lull as early as in March.

Japan's economy is expected to have contracted slightly in the final quarter of last year and is seen rebounding only modestly in the quarter to March.

But some encouraging signs in the economy, such as a rise in factory output, have prompted the government to upgrade its economic assessment and dampened expectations that the BOJ might soon ease policy further by expanding its asset purchases.

"Shirakawa's comments indicate the economy is likely to emerge from a lull and return to a moderate recovery path earlier than previously expected. I think the strong factory output is behind this view," said Susumu Kato, chief economist at Credit Agricole Securities.

"There is now less of a chance the BOJ will ease policy further as it's saying worries over the U.S. economy have diminished."

As widely expected, the BOJ maintained interest rates at a range of zero to 0.1 percent and held off on new policy initiatives at its two-day rate review that ended on Tuesday.

The BOJ is not alone in keeping policy loose. The Federal Reserve is also expected to maintain rates effectively at zero and stick to a cautious view of the U.S. recovery at its rate review on Tuesday and Wednesday.

In its quarterly review of its growth forecasts, the BOJ raised its consumer price projection for fiscal 2011/12 to a rise of 0.3 percent from a 0.1 percent increase forecast three months ago, largely due to higher commodity costs.

But it maintained its forecast of 0.6 percent consumer inflation for fiscal 2012/13, suggesting that it was in no mood to tweak its ultra-easy policy bias any time soon.

Shirakawa said that while he expected commodity prices to continue rising gradually and push up overall prices, what was crucial was for Japan to achieve stable price growth backed by economic strength.

"The BOJ is saying that while there is some volatility in the near term, their view on prices over the next two years is unchanged despite inflation sentiment in Asia, Britain and to a lesser extent in the United States," said Takuji Okubo, chief economist at Societe Generale Securities.

"There is still no exit strategy for the BOJ's accommodative stance. Markets can be assured that the BOJ is highly unlikely to go for more tightening."

The BOJ lifted its GDP forecast for the current fiscal year to growth of 3.3 percent but trimmed its forecast for next year to a 1.6 percent increase, roughly in line with private-sector projections.

The central bank issues long-term growth forecasts in April and October each year, and reviews them in January and July.

The BOJ last year cut interest rates effectively to zero and set up a 5 trillion yen ($61 billion) pool of funds to buy assets ranging from government bonds to private debt.

It has expressed its readiness to top up the pool if the growth outlook deteriorates, but it would have taken a severe market shock, such as another yen rally or a stock market slump triggered by Europe's debt woes, to force the bank's hand.

The BOJ has also pledged to keep rates effectively at zero unless a pickup in consumer inflation to around 1 percent appears on the horizon.