The Japanese central bank decided on Tuesday to keep its key interest rate unchanged and refrain from fresh monetary easing steps, dashing market hopes.

The Bank of Japan (BOJ) announced after a two-day policy board meeting that it voted unanimously to keep the key short-term interest rate at between zero to 0.1 percent.

The BOJ also maintained its assessment that the economy showed signs of picking up. The central bank said in a statement that the domestic demand has seen much progress but the situation facing the export sectors has not been improved.

The central bank's latest Tankan survey report showed earlier that the business confidence index of large manufacturers in Japan stood at minus 4 in March, falling short of market forecasts of an improvement to minus 1.

A negative reading of the business sentiment index indicates pessimism outweighs optimism among those surveyed.

The BOJ expected the economy to return to a moderate recovery track because the pace of recovery in overseas economies is picking up and the demand driven by reconstruction has augmented.

But the BOJ warned that the overall global economy has not stopped the slowdown trend and uncertainties are still lying ahead. The central bank listed factors including the developments of the European sovereign debt crisis and international commodity prices as potential risks to the economy's recovery.