Bank of Japan Governor Masaaki Shirakawa said the central bank will keep monetary conditions accommodative to help pull the country out of deflation.

The economy is picking up with exports and output increasing, but domestic private demand lacks momentum, Shirakawa said on Monday, sticking to the BOJ's economic assessment.

The BOJ recognises that it's very important for Japan's economy to pull out of deflation and return to sustainable growth with price stability, Shirakawa said in a speech to the central bank's regional branch managers.

Shirakawa said Japan's financial system was generally stable but he warned that developments needed to be monitored carefully as weak corporate earnings are expected to cap banks' profitability.

The BOJ is expected to keep interest rates near zero and hold off on new policy initiatives at its policy-setting meeting next week.

The central bank will also review its long-term growth and price forecasts at the meeting, although no major changes to them are expected.

The BOJ is forecasting three years of price falls and has said it will not tolerate zero inflation, let alone deflation, effectively pledging to keep rates near zero for as long as necessary.

(Additional reporting by Rie Ishiguro; Editing by Hugh Lawson)