Japan's central bank has kept its key lending rate unchanged at 0.1% and signalled that a recovery in the world's number two economy is on track despite deflation.
But while strengthening overseas markets and stimulus measures have helped the economy, weak domestic demand poses a hurdle, the bank said.
There is 'not yet sufficient momentum to support a self-sustaining recovery in domestic private demand,' the Bank of Japan said at the end of a two-day meeting.
The BoJ has kept rates unchanged since December 2008 at the height of the global financial crisis and is likely to retain low rates for the foreseeable future due to stubborn deflation.
The bank said the pace of recovery was likely to be 'moderate for the time being', and maintained an earlier view on the need to tackle deflation, which is a drag on growth.
Core consumer prices fell at an annual rate of 1.2% for the 12th straight month in February and the BoJ predicts deflation to continue until 2012.
The government has been raising pressure on the bank to do more to beat deflation, which hurts corporate profits and depresses economic activity as consumers delay spending, hoping for further price drops.
Japan has been grappling with deflation since the late 1990s when an asset bubble burst, ending years of booming growth, while an ageing population that is reluctant to spend has added to the downward pressure on prices.
