The Bank of Japan on Tuesday slashed its growth forecast for the current fiscal year, citing as reasons the appreciation of the yen, the upshot of a slowdown in overseas economies and declining post earthquake reconstruction spending.

The bank's governor Masaaki Shirakawa and the board reduced the economic forecast to two percent from an earlier 2.2 estimate in October. But the central bank left monetary policy unchanged for the third successive month. The policy rate remains at close to zero percent.

The Japanese economy is expected to shrink 0.4 percent in fiscal year 2011, invalidating a previous forecast for a 0.3 percent growth, according to the central bank.

Bank officials noted that the European debt crisis remains Japan's largest threat to its disaster stricken economy.