The Bank of Japan declared the world's third-largest economy is recovering as it voted on Thursday to maintain its monetary stimulus, offering a more upbeat view than last month on growing signs the benefits of its expansionary policy are broadening.
A slew of positive data has underscored the view that robust household spending and the feel-good mood generated by Prime Minister Shinzo Abe's pro-growth policies are gradually prompting companies to increase capital spending and hiring.
The BOJ's upgraded view may heighten the case for Abe to go ahead with a planned sales tax hike from next year, a move seen as necessary to start reining in Japan's huge public debt.
As widely expected, the central bank voted unanimously to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60 trillion yen ($603 billion) to 70 trillion yen.
"Japan's economy is recovering moderately," the BOJ said in a statement, revising up its assessment from August when it said the economy was "starting to recover moderately."
The government is leaning toward raising the tax as planned from April and cushioning the impact with fiscal stimulus. The central bank may also come under pressure to act, although it is in no mood to ease pre-emptively to counter the expected drag on growth.
"The BOJ's upgrade seems appropriate because revised GDP is likely to show that capital expenditure turned positive," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
"Our main scenario is that the BOJ will ease again around the time of the first tax hike next year. There are risks from the Middle East and overseas economies, but if the BOJ eases again it will be for domestic reasons."
Japan emerged from recession in 2012 and data for much of this year has shown the benefits of Abe's reflationary policies and the BOJ's aggressive stimulus.
Recent data have been particularly encouraging, with the jobless rate at the lowest in almost five years, summer bonuses increasing and core consumer prices rising at the fastest pace in nearly five years.
Finance ministry data on Monday also showed a healthy increase in corporate capital spending, pointing to a sharp upward revision to second-quarter GDP data due next week from a preliminary 2.6 percent expansion.
That gives advocates of the tax hike ammunition to counter the views of opponents that Japan should delay or water down the tax increases to prevent the economy from faltering again.
Unless Abe changes the plan, the sales tax will be raised to 8 percent from 5 percent in April and to 10 percent in October 2015. He will decide early next month, taking into account the BOJ's "tankan" business sentiment survey due on October 1.
The BOJ has consistently called for the need to fix Japan's tattered finances and has argued that the sales tax hikes won't threaten the economic recovery or delay an end to deflation.
At a post-meeting news conference, BOJ Governor Haruhiko Kuroda may reiterate the need to keep up efforts to restore fiscal health and argue that any damage from the expected sales tax hike could be overcome without additional monetary stimulus.
Central bankers say they are ready to ease again if risks to growth exceed their expectations and derail the path toward achieving 2 percent inflation in two years. But that does not mean the BOJ will automatically act in response to the government's decision to raise tax, they say.