The Bank of Japan on Friday downgraded its view of the economy for the second straight month.
The move follows Wednesday's "tankan" quarterly survey, which showed that business confidence had weakened at Japan's big manufacturers.
The central bank maintained in its Monthly Report of Recent Economic and Financial Developments, however, that the economy remains on a recovery track.
"Economic growth may remained paused at the start of next year," BOJ Gov. Toshihiko Fukui told reporters.
But Japan's economic recovery "has not at all lost steam," if its overall condition is analyzed, he said.
The October-December tankan showed that the business confidence index for large manufacturers had fallen to 22 from a reading of 26 reported in the previous quarter, marking the first drop in 21 months.
Friday's report also reflects on weaker industrial production in October, the bank said.
In its monthly report, the central bank stated that the economy "continues a recovery trend, although there seem to be somewhat weak movements mainly in production."
This represents a downgrade from the previous report, in which the BOJ had said that "the increase in exports and production seems to be coming to a pause."
The BOJ's monthly report for December also states that a deceleration in production primarily stemmed from inventory adjustments in IT-related sectors, while exports remained mostly unchanged.
Fukui said it is important to monitor demand for IT-related devices to see how long the pause in the economic recovery will last.
The BOJ will also keep an eye on high oil prices and the yen's strength against the dollar, he added. A higher yen could sap Japanese manufacturers' profits overseas.
Also Friday, the BOJ's policy-setting panel elected to keep its ultraeasy monetary stance unchanged.