There's nothing wrong with your engine except that it's underpowered considering the weight of the XJ. Don't despair. You can eke out a few HP from it and make it pretty peppy. CW has already hinted at the mods that you can do. Here's a more comprehensive list:
2.5 I4 (Factory ratings 120hp@5400rpm/140lbft@3500rpm)
1. Cold air intake with 5" Powerstack cone filter
2. 4.0 TB with taper bored to 60mm
3. Poweraid TB spacer bored to 60mm
4. Intake manifold heatshield
5. Flowmaster 50 series 2.25" muffler
6. High-flow cat
7. Clifford Performance header with 2.25" piping
8. Champion copper plugs
9. Magnecor 8.5mm plug wires
10. Electric fan conversion
11. Relocate IAT sensor to cold air intake
With the package of mods listed above, output should improve by 20% to about 145hp. If you want to go beyond mere external bolt-on mods, you can add the aforementioned Mopar Performace Stage 3 cam (256* duration, 0.45" lift) and port the head. These two mods should add a further ~10hp/18lbft to bring the total up to about 155hp/175lbft.
