Bank of Japan Gov. Toshihiko Fukui remained cautious Tuesday over the prospects of an early economic recovery, despite recent stability on the financial markets.

"The economy's momentum for self-sustained recovery will continue to be weak for the time being, as pressure to adjust excessive employment and debts persists," Fukui told a one-day meeting of BOJ branch managers.

The central bank will keep a close watch on financial market developments and their impact on actual business activity, Fukui said.

The quarterly meeting is taking place amid receding uncertainty over factors such as the Iraq war and the outbreak of severe acute respiratory syndrome, as well as relative calm on Japan's financial markets.

The BOJ chief said the economy remains roughly flat.

"As uncertainties over overseas factors have receded to some extent, domestic demand is on a recovery trend backed by better corporate earnings, while imports have leveled off," he said.

Fukui said the short-term money market is "very stable" due to the BOJ's injection of amply liquidity. The stock market has also been firm, while long-term interest rates are rising slightly, he said.

The central bank this month upgraded its assessment of the economy for the first time in a year.

In a monthly report released last week, the BOJ said it perceived an improvement in the export environment and in business sentiment among major manufacturers.

On July 15, the central bank's Policy Board left its monetary policy unchanged, in light of recent financial market stability.

The BOJ said, however, that the financial system is still fragile and that authorities should pay close attention to a possible upsurge in long-term interest rates and their impact.

Tokyo share prices have remained steady in recent trade, with the bellwether Nikkei average moving around 9,400, up about 24 percent from the 20-year low of 7,607.88 marked April 28.