By Ben McLannahan in Tokyo

The Bank of Japan has sharply revised down its growth forecasts for the current fiscal year, noting the effects of weak overseas economies, flooding in Thailand and the appreciation of the yen.

The BoJ now expects real gross domestic product to shrink by 0.4 per cent in the year ending in March, rather than growing by 0.3 per cent, as it predicted last October. The bank has also revised down its forecast for the year ending in March 2013, from 2.2 per cent growth to 2 per cent.

The revisions were expected, given lacklustre export and consumption data since October said Junko Nishioka, chief Japan economist in Tokyo at RBS Securities and a former BoJ official.

However, analysts say that the BoJ may also have been surprised by the slow pace of reconstruction spending in the earthquake-affected region of Tohoku, where efforts to rebuild whole communities have hit bottlenecks.

Meanwhile, a steady influx of insurance claims and donations has driven Tohoku banks? ratio of loans to deposits down to 52.9 per cent in November from 59.1 per cent in March, a fall more than ten times greater than the national average.

?The timing for reconstruction-related demand to emerge full throttle? remains unclear, said Daiju Aoki, economist at UBS in Tokyo. Tohoku represents about 7 per cent of total GDP.

The central bank left its key monetary policy settings unchanged. It will keep its asset-buying fund at Y20tn ($260bn), and its credit-lending program at Y35tn.

The bank will also keep its benchmark interest rate between zero and 0.1 per cent. The BoJ confirmed that it would continue this ?virtually zero? interest-rate policy until the year-on-year rate of change in the consumer price index is around 1 per cent. The BoJ says CPI is currently around 0 per cent, a level it has rarely nudged above since 1998.

Separately, finance minister Jun Azumi told parliament on Tuesday that allowing further deterioration in the nation?s finances would present a ?significant risk to stable economic growth?.

Japan has the world?s highest net debt burden, according to the Organisation for Economic Co-operation and Development, at 120 per cent of GDP last year. Efforts to contain it should be made ?as soon as possible,? Mr Azumi said.

? The Financial Times Limited 2012