TOKYO, Oct. 15 (Xinhua) -- The Bank of Japan (BOJ) said Thursday that the Japanese economy "has started to pick up".

    In its Monthly Report of Recent Economic and Financial Developments released on Thursday, the central bank said that with public investment, exports and production all on the increase there were signs that economic recovery was on the way.

    It did sound a note of caution, however, noting that private consumption and housing investment remain weak, saying this shows "Japan's economic conditions are likely to improve gradually."

    The bank mainly saw positives in general improvements in the global economy, saying that it expected to see exports and production to continue rising as economic conditions improved overseas.

    On the domestic front, however, the BOJ said that it did not see many signs of improvement.

    "With the exception of durable goods consumption, which is expected to remain firm for the time being mainly due to the effects of various measures, domestic private demand as a whole is likely to remain relatively weak with corporate profits and the employment and income situation remaining severe," the report said.

    On Wednesday the BOJ surprised market watchers when after a two-day policy meeting it failed to mention any reduction of stimulus measures put in place to try to reinvigorate the Japanese economy.

    The bank also commented on the effect of the price of petroleum products, which have declined dramatically over the last year. It said that once the price of petroleum has stabilized year-on-year, it expects prices for domestic corporate goods on the whole to stop declining, as companies at the same time adapt to the low demand for goods in the current economic conditions.

    The report also noted that Japanese companies are now borrowing less money as many have managed over the last few months to return to liquidity.

    "In these circumstances, firms' financial positions, although many firms, mainly small ones, still see them as weak, have continued to improve as a whole," it said.

    The report comes on the back of two months of generally positive data on the Japanese economy and business sentiment across the nation.

    While year-on-year data has continued to show that conditions are much worse than they were in the early days of the crisis that followed the U.S. credit crunch, most statistics show prices, production and consumption have generally stabilized or are showing small improvements.

    The report is likely to be welcomed by markets, which were boosted Thursday after the Dow Jones Industrial Average in the United States broke through the 10,000-point barrier for the first time in around a year on Wednesday on the back of better than expected results for JP Morgan Chase in the July to September quarter.

    The report will be a cause for concern for the Democratic Party of Japan, however, which has said it hoped Japan to become a two-tier economy, in which domestic demand plays as big a part as exports. In its election manifesto it stated that it aims to "change the Japanese economy into one centered on domestic demand."

Special Report:  Global Financial Crisis