In a quarterly review of its long-term forecasts, the BOJ cut its core consumer inflation forecast for fiscal year 2015/16 to 1 percent from an earlier projection of 1.7 percent.
For the current year ending March 2015, it now expects core CPI at 0.9 percent, down from an earlier target of 1.2 percent. But it slightly raised its inflation forecast for fiscal 2016/17 to 2.2 percent from 2.1 percent.
It also increased real GDP growth forecast for the next financial year to 2.1 percent versus an earlier target of 1.5 percent. But GDP for the current year is expected to contract 0.5 percent compared with an earlier projection of 0.5 percent growth.
In a media briefing following the decision, governor Haruhiko Kuroda kept a sanguine outlook for Japan, saying the positive economic cycle remains intact, and defended his target for consumer inflation to hit 2 percent in fiscal 2015/2016.
"Consumer inflation will slow for the time being due to oil price falls," said Kuroda. "On the assumption that oil prices will flatten out at current levels and rise moderately ahead, the effect of the oil price decline will ease. If so, we expect consumer inflation to reach 2 percent in a period centered on fiscal 2015."
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Japan's economy has been on the backfoot ever since the government raised nationwide consumption tax to 8 percent from 5 percent last April, in a bid to reduce the country's massive debt.
The economy slipped into recession in the third quarter, contracting an annualized 1.6 percent after shrinking 7.3 percent in the second quarter.
The BOJ surprised markets in October last year by expanding its bond-buying program for the first time since in came into effect in April of 2013. Some analysts expect further easing as the central bank sought to meet its inflation targets.
"I think the BOJ still has to deliver further stimulus and it could come as early as April," said Izumi Devalier, Japan economist at HSBC.
"If you read between the lines of today's policy statement, they are pinning their hopes on a recovery in oil prices - looking at Brent to recover to $70 a barrel in 2016. On top of that they are looking for strong wage gains. if they don't get these elements, they will undershoot their inflation target again," she added.
But Harumi Taguchi, principal economist, at IHS Global Insight, says the BOJ's upbeat assessment seems to suggest they will stand pat in the near term.
"That said, the bank's economic and inflation outlook still depends on wage growth in order to counter inflationary pressure and strengthen consumer spending," Taguchi added.
— Reuters contributed to this report.