The Bank of Japan (BOJ) maintained its target for raising the monetary base by an annual pace of 60-70 trillion yen and still expects inflation to rise in the next two years as "inflation expectations appear to be rising on the whole."
A majority of the BOJ's board members maintained their forecast from October, expecting economic growth of 3.3 percent in fiscal 2014, which begins April 1, and 2.6 percent in fiscal 2015.
Inflation is forecast to rise to 3.3 percent in fiscal 2014 and then ease to 2.6 percent in 2015. Excluding the impact of sales tax hikes in April this year and October 2015 to cut budget deficits, inflation is forecast at 1.3 percent in fiscal 2014 and 1.9 percent in fiscal 2015.
For fiscal 2013 Gross Domestic Product is forecast to rise by 2.7 percent and inflation of 0.7 percent.
The BOJ, which embarked on an aggressive easing campaign last April to rid the country of some 15 years of deflation, said Japan's economy was "expected to continue a moderate recovery" - a phrase it has used in recent months - and has noticed front-loaded increases in demand ahead of the tax rises.
"The year-on-year rate of increase in the CPI, excluding the direct effects of the consumption tax hike, is likely to be around 1-1/4 percent for some time," the BOJ said.
Japan's headline inflation rate jumped to 1.61 percent in November from 1.1 percent in October, the sixth month in a row with higher prices after 12 straight months of deflation.
"The Bank will continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner," the BOJ said, adding that it would examine both upside and downside risks and make adjustments as appropriate.
On Monday Japan's economics minister, Akira Amari, said that Japan appeared to have escaped deflation but warned that a return of deflation could not be ruled out. While the BOJ aims to reach its inflation target in about two years, some of its board members have said this is too ambitious.
Japan's GDP rose by 0.3 percent in the third calendar quarter from the second for annual growth of 2.4 percent, up from 1.2 percent.
While maintaining its growth and inflation forecasts from October, the BOJ also largely repeated its view of the economy, saying exports had been picking up along with fixed investment and corporate profits. Housing investment has also continued to rise while private consumption has remained resilient, an area where the BOJ has observed a front-loading of demand ahead of the tax rises.