NEW YORK (CNN/Money) - The outlook for Japan's economy grew rosier Wednesday, with the Bank of Japan upgrading its outlook and stepping in to keep the surging yen in check, prompting a key stock market gauge to climb to its highest level in nine months.

The Bank of Japan, the central bank for the world's second-largest economy, said "the pace of deterioration in Japan's economy has moderated" on the strength of rising exports that have increased production and cut down on a surplus of goods on manufacturers' shelves, paving the way for more production in the future.

Reinforcing the bank's view, the government said its all-industries index, a proxy for gross domestic product (GDP), the broadest measure of an economy's strength, grew 0.6 percent in the first three months of 2002, its first quarterly gain in a year.

And another index, which measures the strength of service industries, rose 1.2 percent in March, its first gain in four months and the biggest gain in a year.

As a result, the benchmark 225-issue Nikkei stock market average rose 160.82 points Wednesday to close at 11,961.98, a 1.4 percent gain and its highest finish since Aug. 8, 2001, when it closed at 12,163.67.

The yen also surged against the U.S. dollar, further encouraged by weakness in U.S. stocks Tuesday and threats of new terrorist attacks. The dollar bought 124.72 yen by late afternoon, down 0.92 yen from late Tuesday in Tokyo, but above its late New York level of 124.09 yen. In early trading, the dollar had sunk to 123.90 yen, its first dip below 124 yen since Dec. 3.

The Finance Ministry confirmed it stepped into the market, buying dollars to undercut the yen's strength, amid worries in Washington about the U.S. currency's prolonged slide and fears in Japan that a strong yen could hurt exports, the life-blood of its economy, snuffing the nascent recovery.

"Recent movements of the exchange rate have been too rapid," Finance Minister Masajuro Shiokawa said. "We have taken appropriate action today in the exchange market."

In its statement, the Bank of Japan also warned that corporate investment and consumer spending continued to lag. Some critics have said that Japan's over-reliance on exports will not support stable, long-term growth. Japan's jobless rate has fluctuated at near-record levels of about 5 percent for months, and the average pay of Japanese workers has been declining steadily, conditions that are anathema to consumer spending, the central bank noted.

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The bank also left its monetary policy unchanged, sticking to its stance of freeing up cash to circulate through the financial system. Still, many economists are expecting strong GDP growth in the first quarter of between 8 and 9 percent, ending a three-quarter-long recession that was the deepest in 50 years.