Downside risks to Japan's economy are diminishing now that emerging economies look set to post higher growth, Bank of Japan Gov. Masaaki Shirakawa said Wednesday.

"Based on a high possibility that emerging countries and those with resources will continue to grow at a higher rate, risks seem to be becoming balanced, compared with the situation in early spring, when risks were generally tilted toward the downside," Shirakawa said in a speech in Tokyo.

In its economy and prices report released last week, the central bank said prices would continue to fall until fiscal 2011. Shirakawa, however, said deflation will not make the recession worse.

"At present, the BOJ is of the understanding that the chances are low that the fall in prices will push down the economy," Shirakawa said, adding the financial system has generally stabilized.

The BOJ Policy Board decided Friday to maintain the key interest rate at around 0.1 percent.

Although the economy has finally started recovering, it will be some time before it returns to a full revival path, Shirakawa said, repeating the BOJ's intention to keep interest rates low.

"By maintaining an extremely easy financial environment, the BOJ intends to persistently support our economy so it will return to a sustainable growth path with price stability," he said.

As for the outlook for Japan's economy, Shirakawa said it will pick up toward March as overseas economies improve and economic stimulus measures continue.

But he warned that the pace of recovery will be slow until the middle of next year because the pace of global economic recovery also will be slow and because the impact of Japan's stimulus measures might weaken by then.

Shirakawa, however, said the domestic economy is likely to strengthen in fiscal 2011 as exports and corporate performance improve.