Bank of Japan Governor Haruhiko Kuroda also said the recent stock price rally reflected market optimism over the global economic outlook, brushing aside views its ultra-loose policy was fuelling an asset price bubble.
"Optimism over the global economic outlook and steady vaccine roll-outs may be behind the recent surge in stock prices," Kuroda told parliament.
"But the global outlook remains highly uncertain," he said, adding that risks to Japan's economy remained skewed to the downside.
Japan's stocks rose to a 30-year high on Tuesday in line with a global market rally reflecting hopes of big stimulus and steady vaccine rollouts.
The BOJ has unveiled a plan to review its policy tools, including its ETF-buying programme, in March to make it more sustainable as the COVID-19 pandemic forces it to maintain its stimulus for a prolonged period.
Kuroda said the review would address the side-effects of prolonged easing, as the hit to growth from the pandemic may keep his 2% inflation target elusive for years.
"It may be difficult for inflation to reach 2% in 2021, 2022 and even 2023," Kuroda said. "It's not as if our efforts have had no effect. But we need to do more, given the fact inflation hasn't reached 2% despite eight years (of easing)," he said.
Kuroda's second five-year term as BOJ governor ends in April 2023.
Core consumer prices fell 1.0% in December from a year earlier, marking the biggest drop in a decade, a sign of intensifying deflationary pressure.
Kuroda said it was premature to debate an exit from the central bank's super-loose policy including the BOJ's huge ETF purchases, as the pandemic continues to ravage the economy.
"Our ETF buying has had a positive impact on the economy and prices. We don't have any plan to end or permanently reduce our purchases," Kuroda said. "We'll look into ways to address (the side-effects) at our March review," he said.
Under a policy dubbed yield curve control, the BOJ guides short-term interest rates to around -0.1% and 10-year yields to around zero. It also buys huge amounts of assets such as ETFs as part of efforts to achieve its 2% inflation target.
The BOJ's plan to review its policy tools in March reflects a growing concern among policymakers over the rising cost of extended easing.
Some analysts also criticise the BOJ for continuing its huge ETF buying at a time Tokyo stock prices have set new highs.
(Reporting by Leika Kihara; Editing by Kim Coghill, Ana Nicolaci da Costa and Giles Elgood)
By Leika Kihara