BOJ Governor Haruhiko Kuroda shrugged off concerns over U.S. President Donald Trump's protectionist policy stance, saying that his promises of tax cuts and big infrastructure spending - if implemented - will help boost U.S. and global growth.
But the central bank said risks to Japan's price outlook were skewed to the downside, as recent weakness in inflation was preventing expectations of future price growth from heightening.
"When economic growth overshoots and exchange-rate factors (work to push up prices), inflation forecasts tend to overshoot too. But so far, underlying consumer price figures are quite weak," Kuroda told reporters on Tuesday.
As widely expected, the BOJ maintained a pledge to guide short-term interest rates at minus 0.1 percent and the 10-year government bond yield to around zero percent.
In a quarterly review of its forecasts, the BOJ raised its growth estimates for the fiscal year beginning in April to 1.5 percent from 1.3 percent forecast in November, nodding to brightening prospects for exports.
It also hiked its forecast for fiscal 2018 to 1.1 percent from 0.9 percent.
But the central bank left unchanged its already optimistic inflation forecasts for the coming years even as external factors push up prices, such as a rebound in oil prices and rising import bills from a weak yen.
"The momentum for achieving our 2 percent inflation target is maintained, but lacks strength," the BOJ said in the quarterly forecast report, warning that global uncertainties could make companies cautious of hiking prices and wages.
Japan's core consumer prices marked the 10th straight month of annual declines in December despite more than three years of aggressive money printing by the BOJ, underscoring the country's sticky deflationary mindset.
With domestic demand just emerging from last year's weakness, many central bankers remain wary on whether price rises driven by external factors could transform into sustained price growth.
"The yen's declines since November will gradually push up import prices, so one would naturally turn optimistic on the price outlook for the first half of this year," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
"But the BOJ was cautious, probably because board members aren't sure whether wages will rise in spring wage negotiations" between companies and labour unions, he said.
The BOJ said it expects inflation to hit its 2 percent target by around March 2019, unchanged from its forecast in November.
Under a new policy framework adopted in September, the BOJ now targets interest rates instead of base money. It has said it could slow its bond buying in the future, if the rate targets could be met with fewer purchases.
Japan's growth remained anaemic in the first half of last year as consumption slumped. But a pick-up in global demand has helped exports recover, giving rise to market bets the BOJ's next move may be to hike - not cut - rates.
"If the economy continues a steady recovery in coming months, we expect the BOJ's next step to be a tightening, not an easing, of policy," said Yuichiro Nagai, an economist at Barclays Securities Japan.
The recovery prospects and sharp rise in global yields on hopes of Trump's reflationist policies have encouraged talk among some investors of a rate hike by the BOJ as early as this year.
Speculation that the BOJ could taper its asset purchases earlier than expected heightened also after the BOJ skipped a much anticipated auction to buy short-term debt last week.
"The BOJ does not give out any signs on the outlook for monetary policy through its daily market operations," Kuroda said, seeking to allay fears of an early tapering.
The BOJ announced later on Tuesday it plans to keep the amount and frequency of its bond buying in February unchanged from January.
Still, uncertainty over Trump's policies is emerging as a new headache for Japanese policymakers worried about a resurgent yen - an unpalatable prospect for the export-reliant economy.
The dollar slumped against the yen this week as the Japanese currency benefited from its safe-haven status after Trump's tough stance on migration rattled investors and curbed risk appetite.
Kuroda repeated his view that it was desirable for currency rates to move stably reflecting economic fundamentals.
(Additional reporting by Minami Funakoshi, Stanley White and Tetsushi Kajimoto; Editing by Eric Meijer & Shri Navaratnam)
By Leika Kihara