It projects inflation to accelerate to 1.7 percent the following year and hit 1.9 percent in fiscal 2019.
"Today's downward forecast adjustment highlights that the Bank is still struggling to lift inflation", research house Capital Economics said in a commentary.
The BOJ kept its policy unchanged, as expected, but Governor Haruhiko Kuroda conceded that public perceptions of future price rises remained subdued, suggesting the central bank will significantly lag its USA and European peers in exiting its massive stimulus program.
The BOJ also revised its outlook on economic growth in 2017-18 amid signs of progress since the start of the year.
The Bank of Japan (BoJ) held the benchmark interest rate steady at -0.1% and kept the yield target for 10-year Japanese government bonds around 0%.
Policymakers on Thursday lowered their inflation forecast to 1.4 per cent for the fiscal year to March 2018 from an earlier estimate of 1.5 per cent. BOJ Gov. Haruhiko Kuroda said last week that the accommodative policy and asset purchases will continue for some time because inflation is "quite sluggish", underscoring how far the BOJ lags behind its counterparts in the US and Europe.
"What's more, we believe that the Bank remains too optimistic about inflation". However, it maintained it aims to achieve its price target by next year.More news: Call of Duty: WWII Delivers Gripping Action on Global Scale
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It also kept intact a loose pledge to buy government bonds so its holdings increase at an annual pace of 80 trillion yen ($719-billion), defying market speculation the guidance could be removed to pave the way for an eventual withdrawal of stimulus.
"This may happen at its quarterly forecast review in April", said Kazuo Momma, a former top BOJ economist.
Construction in preparation for the 2020 games is expected to pick up next year, though the BOJ has estimated it will contribute only 0.7 percent of GDP in 2018.
"Discussing an exit strategy in detail at this time would bring turmoil to financial markets", he said.
"The forecasts didn't change much but reading between the lines of the statement you can see their rising confidence", said Maiko Noguchi, senior economist at Daiwa Securities and a former central bank official.
Consumer prices in February were up only 0.2 percent -far below the bank's inflation target of 2 percent.
After three years of heavy money printing failed to drive up inflation, the BOJ revamped its policy framework last September to one better suited for a long-term war against deflation.