The sky-high yen and global economic downturn will likely continue to exert downward pressure on the economy in 2012, but domestic demand linked to postdisaster reconstruction work is expected to underpin growth.

Japan is stepping up its austerity measures, including preparations for raising the consumption tax as early as in 2013, amid increasing concern that any delay in fiscal rehabilitation could in the long term cause the bond market to collapse in a similar manner to eurozone nations.

The Bank of Japan, which has little room to lower its key interest rate from the current zero to 0.1 percent range, may lack alternative options to boost economic growth, although expanding its asset-purchase program could be an option.