The Bank of Japan has kept its key interest rate unchanged at 0.1% and underlined its determination to overcome deflation.
As expected, the board of the central bank unanimously opted to keep interest rates just above zero.
It said the economy was improving, but further government support was needed to maintain the recovery. The board also said overcoming deflation was a "critical challenge".
The BoJ expects the economy to shrink by 2.5% in the current financial year, an improvement on its previous estimate of a 3.2% contraction.
It also forecast growth of 1.3% for the 2010-2011 financial year, up from its previous estimate of 1.2%.
The bank was less optimistic about deflation, saying that prices were likely to continue falling for three years.