The Bank of Japan on Thursday joined other central banks in taking a step towards phasing out emergency measures aimed at tackling the impact of the financial crisis, saying it would stop buying ­corporate bonds and commercial paper at the end of the year.

However, in a sign that Japan’s central bank remains cautious about the downside risks to the ­economy, it extended its programme to provide limitless lending to help corporate financing until the end of the fiscal year, next March.

The BoJ, which forecast that deflation would continue until 2011, also left its benchmark interest rate at 0.1 per cent.

The moves highlight the central bank’s view that while conditions have been improving, the recovery of the Japanese economy would be very slow and moderate and would hinge largely on a pick-up in global economic activity.

“The uncertainty …remains high,” the BoJ said in its semi-annual outlook on economic activity.

The bank estimates that, due to the significant deterioration in economic conditions, Japan’s potential growth has declined “to around 0.5 per cent” from “around 1 per cent”.

Masaaki Shirakawa, governor, said that since “the pace of improvement is likely to be moderate until around the middle of fiscal 2010”, the BoJ “will aim to maintain the extremely accommodative financial environment”.

The central bank’s move to end its purchases of corporate debt came as government data showed the Japanese economy continues to recover gradually, with unemployment improving unexpectedly for a second month running.

The jobless rate fell to 5.3 per cent in September, from 5.5 per cent in August and a record 5.7 per cent in July, indicating that an improvement in exports and production is filtering through to employment.

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