The Bank of Japan on Tuesday cut its growth forecast for the nation's economy in fiscal years 2011 and 2012, citing downside pressures from a slowdown in overseas economies, a firm yen and waning post-quake reconstruction demand.
Japan's economy is expected to shrink 0.4 percent in fiscal year 2011, the central bank said, reversing previous projections for a 0.3 percent growth. For fiscal year 2012, the BOJ also cut its economic forecast to 2 percent, slightly lower than a previous estimate of 2.2 percent made in October.
Following a two-day meeting, the BOJ's policy board, led by the bank's governor Masaaki Shirakawa, said that the revisions made to growth forecasts reflect the board's concerns about a myriad of factors including the eurozone debt crisis and the rise of the yen.
"Japan's economic activity has been more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen," the BOJ said in a statement issued Tuesday.
The central bank added that the outlook was for a "moderate recovery as the pace of recovery in overseas economies picks up... and reconstruction-related demand after the March 2011 earthquake disaster gradually materializes."
Although the BOJ maintained its key interest rate at effectively zero and raised its GDP projection for fiscal year 2013 to 1.6 percent growth in real terms, slightly higher than a previous forecast of 1.5 percent, the bank did warn that Japan was not immune from the sovereign debt crisis in the eurozone.
"Growth prospects for fiscal years 2012 and 2013 will likely remain broadly unchanged because the economy is expected to gradually return to a moderate recovery path in the first half of the year starting April 1," the bank said.
The bank indicated however that the debt contagion in the 17- nation, single currency eurozone could spill over, dragging down global financial markets and plunging the world into a fresh recession.
"The sovereign debt problem in Europe could result in weaker growth not only in the European economy but also in the global economy particularly through its effects on global financial markets," the BOJ said in its statement.
On the prices front, the bank said that in light of lingering deflation, it expected prices to remain, by-in-large, flat in both 2011 and 2012, with an expected deflation rate of minus 0.1 for fiscal year 2011, compared with earlier forecasts of zero percent.
But for the year beginning in April 2012, the bank said it expects an inflation rate of 0.1 percent, compared with previous estimates of 0.1 percent in fiscal year 2012.
The central bank also opted to keep its asset-buying fund at 20 trillion yen (260 billion U.S. dollars), and its credit-lending program at 35 trillion yen, it said in the statement./.