Following its January projection of the worst negative economic growth in the postwar era, Japan's central bank has revised its forecast downward as the worldwide economic crisis deepens, and the world's second largest economy is expected to plunge into worse recession.

At the policy-setting meeting on Thursday, the Bank of Japan (BOJ) lowered its projections for the nation's economy, predicting a 3.1 percent year-on-year contraction for its real GDP in fiscal 2009, against a previously estimated 2.0 percent shrinkage.

The prediction came three days after the cabinet office downgraded its economic projection from a previously estimated zero growth to a shrinkage of 3.3 percent for fiscal 2009, labeling the Japanese economy as "deteriorating at an unprecedented speed" amid the ongoing financial crisis.

Meanwhile, the BOJ sounded a warning about deflation as it projected a 1.5 percent contraction in the consumer price index, excluding volatile fresh food prices, up from the previously predicted 1.1 percent fall.

In its biannual economic report entitled "Outlook for Economic Activity and Prices," the BOJ said, "Economic conditions in Japan have deteriorated significantly."

The report pointed out that weakening corporate earnings and financial conditions have caused significant cuts in capital investment, and worsening employment and income conditions have sharply discouraged consumer spending.

Other economic figures also added blueish tint to the already bleak prospect for the economy.

According to the statistics released Thursday by the Japan Automobile Manufacturers Association, the nation's auto production and exports dropped for the first time in seven years in fiscal 2008 due to a plunge in vehicle sales worldwide triggered by the global financial crisis.

In fiscal 2008 ending on March 31, Japan's auto output plummeted 15.2 percent year-on-year to 9,993,756 units while exports slumped 17.2 percent to 5,602,813 units, said the industry body.

In fiscal 2009 ending on March 31, 2010, the cabinet office predicted that exports will plunge 27.6 percent year-on-year, down from a 3.2 percent decline estimated in December while business investment is revised downward from a 4.2 percent fall to a record plunge of 14.1 percent.

"Economic conditions are likely to continue deteriorating in the coming months but gradually level out thereafter, and the growth rate is expected, from the latter half of fiscal 2009, to recover at a moderate pace," said the BOJ report.

The recovery, said BOJ Governor Masaaki Shirakawa, is highly dependent on developments in overseas economies and global financial markets.

"It's still highly uncertain how the restructuring of the US and European financial systems is likely to proceed and how rapidly demand around the world, especially in emerging economies, is likely to recover," Shirakawa said at a press conference after the policy meeting.

In light of the grave economic situation, the eight-member BOJ policy board voted unanimously to hold the overnight call rates unchanged at 0.1 percent.