The Bank of Japan (BOJ) expects consumer price deflation to persist despite a stronger economy and higher wholesale prices.
A strong economic recovery, underlined in the government's upgraded economic assessment released later in the day, in addition to a US rate increase, have stoked speculation that the BOJ may soon abandon its ultra-loose monetary policy.
BOJ Governor Mr Toshihiko Fukui said, however, the central bank will persist with its loose monetary policy until the consumer price index stabilises above zero.
"We do not want to see an unfortunate recurrence of prices falling back into negative territory, and we do not want to nip the positive economic outlook in the bud," Mr Fukui told a news conference after the BOJ left policy unchanged, as expected.
The trend in the core nationwide consumer price index (CPI), is crucial for financial markets because the BOJ has pledged to maintain its policy until the CPI starts rising steadily.
The CPI was down 0.3 per cent in May from a year earlier, the reason why the BOJ opted against a change in monetary policy even though data this week showed the CGPI rose 1.4 per cent in June from a year ago, the strongest rise since September 1997.
In the latest upbeat economic data for Japan, the government revised up industrial output for May, saying it rose 0.8 per cent from April on a seasonally adjusted basis, instead of an initial reading of a 0.5 per cent rise.
The figures follow the BOJ's "tankan" corporate sentiment survey two weeks ago that showed big manufacturers' business confidence at the highest level since 1991.
Japan's economy grew by more than 6 per cent in real annualised terms in each of the two quarters to March.