Japan's central bank said Tuesday it expects the economy to shrink slightly during the fiscal year ending in March instead of expanding as it forecast earlier because of the overseas slowdown.
The Bank of Japan kept its key interest rate the same at close to zero percent but downgraded its growth forecast for the year ending March 2012 to a 0.4 percent contraction from the 0.3 percent expansion it gave in October.
The bank stuck to its projection for a moderate recovery starting the first half of the next fiscal year.
But it lowered its projection for fiscal 2012 to 2.0 percent growth from 2.2 percent growth. It was more upbeat about fiscal 2013, raising that to a 1.6 percent expansion from 1.5 percent.
The bank said the massive debt problems in Europe as well as uncertainty about the U.S. economy are risks for Japan's outlook.
The strong yen, which erodes the value of exports from the world's third largest economy, also dragged down growth, keeping economic activity "more or less flat," it said.