Japan's economy got a double dose of good news on Friday with an upbeat assessment by the central bank and figures showing new investment, but the kidnapping of three Japanese in Iraq worried financial markets.
The yen dipped against the dollar then steadied, while Tokyo share prices ended lower on worries that the kidnappings could damage Prime Minister Junichiro Koizumi's administration.
The Bank of Japan raised its assessment of the economy in its April report, highlighting an improvement in domestic demand, and left its ultra-easy monetary policy unchanged.
Orders for machinery, meanwhile, rose 4.9 percent in February over January, the government said, below the 7.2 percent forecast in a Reuters poll last week but a sign that companies were continuing to invest.
"The results were slightly worse than the market had expected, but it doesn't mean that this will change the (stock) market's strong fundamentals," said Masatoshi Sato, a senior strategist at Mizuho Investors Securities.
"Machinery orders data also tends to be volatile."
The figures join a string of bright economic data in recent weeks to boost confidence that Japan's recovery, dominated by the country's car, electronics, machinery and other exporters, is spreading to domestic companies and consumers.
The BoJ's quarterly "tankan" survey of corporate sentiment issued last week showed companies were more confident than at any time in about seven years, with a particular improvement among non-manufacturers and small firms, which have lagged exporters.
"Japan's economy continues to recover gradually and domestic demand is becoming firmer," the central bank said in the headline phrase in its monthly report for April. In March it had not referred to an improvement in domestic demand.
"As for the outlook, Japan's economy is expected to gain further momentum gradually," it said, citing an increase in company profits that should feed through to better employment conditions and higher wages.
Earlier on Friday the BoJ's Policy Board voted unanimously to keep the target volume of banks' current account deposits at the central bank at 30-35 trillion yen ($282-329 billion).
That was the level it set when it eased monetary policy in January to keep interest rates near zero.
Current account deposits comprise bank reserves and reserves put up by other financial institutions such as brokerages. The BoJ targets the deposits rather than interest rates to boost economic activity.
Unlike in the United States, where speculation of an interest rate rise is increasing as economic conditions improve, analysts expect the BoJ to maintain its current easing policy for at least another year because of persistent price declines.
BoJ Governor Toshihiko Fukui reinforced this point on Friday, saying the BoJ had no plans to lower its liquidity target in the near future and was not considering ending the loose monetary policy.
"There was some speculation that the BoJ might ease further," said Eiji Dohke, chief strategist at UBS Securities. "But the BoJ couldn't ease with stock prices rising and the recovery firm."
Fukui told a news conference that Japan's financial markets were capable of absorbing shocks such as the Iraq hostage crisis, but added that the central bank would keep a close eye on any fallout on the economy.
"We agreed to closely and calmly watch any impact on the markets and on the real economy in the future," he said.
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