July 6 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa said exports and industrial output are recovering after plunging at a unprecedented rates earlier this year.

“Exports and production have begun to turn around,” Shirakawa said at a quarterly meeting of the central bank’s branch managers in Tokyo today. The economy “is likely to show clearer evidence of leveling out over time.”

Shirakawa said that the deterioration in the global economy and financial markets have also eased, adding that Japan’s recovery may lose momentum as companies trim investment and job losses undermine consumption. The fragility of the rebound may prompt the bank to extend its unprecedented steps of buying corporate debt from lenders and providing them with unlimited credit.

“Companies feel the economy is still in a severe state,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “It’s questionable whether the central bank would dare to take action that could fuel speculation about its existing policy.”

The Nikkei 225 Stock Average fell 1.7 percent to 9,652.41 as of 10:53 a.m. and the yen traded at 95.55 per dollar from 95.82 before Shirakawa’s speech.

The Tankan index of sentiment among large makers of cars, electronics and other products rose to minus 48 in June from March’s record low of minus 58. Even so, large companies surveyed plan to cut spending by 9.4 percent in the year to March 2010 and an index of their excess workers stayed close to the worst in seven years.

Economy Grows

The world’s second-largest economy probably grew for the first time in a year last quarter as exports stabilized and companies increased production to replenish inventories. Gross domestic product rose at an annual 2.3 percent pace in the three months ended June 30 from the previous quarter’s record 14.2 percent contraction, according to economists surveyed by Bloomberg.

Shirakawa reiterated that the bank needs to monitor downside risks for the economy and prices.

Since lowering the overnight lending rate to 0.1 percent in December, the central bank began to buy commercial paper and corporate bonds from lenders. It has also offered to lend to commercial banks limitlessly in exchange for sufficient collateral. The programs expire on Sept. 30.

Shirakawa said last month that the bank will decide the future of the operations “by the end of September in a predictable manner to market participants” based on an assessment of the economy, financial markets and funding conditions for businesses.

Shirakawa said today financial conditions remain tight even though it has become easier for companies to sell commercial paper and corporate bonds.

The central bank will publish a quarterly report on regional economies, Japan’s equivalent to the U.S. Federal Reserve’s Beige Book, at 2:30 p.m. in Tokyo. Heads of the bank’s branches in Osaka, Nagoya, Sapporo and Fukuoka will brief the press about their economies later today.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: July 5, 2009 21:54 EDT