IMF cuts global growth forecast, euro area moves back into expansion but Japan shrinks

The IMF has cut its global growth forecast for this year to 3.3 percent from a September forecast of 4 percent. Olivier Blanchard, the IMF’s chief economist, told a news conference on Tuesday that the “epicenter of the danger is Europe but the rest of the world is increasingly affected”.

Ironically, this comes on the day when the eurozone economy is looking better. While eurozone industrial orders fell 1.3 percent in November, Markit's flash eurozone composite PMI jumped to 50.4 in January from 48.3 in December, with the manufacturing PMI rising to 48.7 in January from 46.9 in December and the services PMI rising to 50.5 from 48.8.

There was also positive news from the US on Tuesday, where the Richmond Fed's manufacturing index rose to 12 in January from 3 in December.

The news from Japan, though, has been negative.

While many fear that Europe's debt crisis may make it the next Japan, it may well be Japan that becomes the next Europe. The government said on Tuesday that it will miss its deficit reduction target. The ratio of its primary budget deficit to gross domestic product will be halved one year later than planned after it pushed back the timing of a sales tax increase. And by fiscal year 2020/21, the primary deficit is projected to be 3.0 percent of GDP, well short of its target to return to a primary budget surplus.

Japan's debt problem is being exacerbated by slow economic growth. On Tuesday, the Bank of Japan reported lowered growth estimates for the economy as it left its key interest rate unchanged at between zero and 0.1 percent. It now sees the economy shrinking 0.4 percent in fiscal year 2011, down from its previous projection of 0.3 percent growth. The BoJ also said it expected growth of 2.0 percent in fiscal year 2012, down from its previous forecast of 2.2 percent growth.

It does not help that Japan's trade surplus has vanished. A report on Wednesday showed that exports fell 8.0 percent in December from a year earlier, resulting in an annual trade deficit of 2.49 trillion yen, the first annual deficit in 31 years.