China and Japan stoking two-speed Asia, IMF says

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Chinese worker
Image caption,
China's economy is growing at a break-neck pace

The International Monetary Fund (IMF) has been taking the temperature of the global economy.

Once again it is very much a tale of two different worlds.

Developing countries, including those in Asia, are warming up nicely, but are in some danger of boiling over. The developed economies are still sluggish, recovering much less convincingly.

The pattern within Asia mirrors that divide. China surges while Japan is due for a year of very modest growth.

It has been a persistent pattern since the financial crisis and the global recession that followed it.

There has been a slow rebound in the countries at the centre of the crisis, especially those caught up in what you might call phase two, the sovereign debt crisis in the euro area. But developing countries have come back to full-speed growth much faster.

Global imbalances

In fact there is a degree of wariness in the IMF's World Economic Outlook .

Image caption,
Although Japan is a big exporter, growth remains slow

Some countries are in danger of overheating. There is also the long standing concern about global economic imbalances - China not importing and the US not exporting enough.

It is not hard to see where this is going; that old refrain of more exchange rate flexibility.

It would help with both problems. If countries with trade surpluses - China is the obvious example - allowed their currencies to rise, they would eventually export less and import more.

And by making imports cheaper it would help with the inflation problem.

Additional uncertainty

Japan is an economy that does not fit so neatly into the pattern.

It was peripheral to the financial crisis, but after a decent early rebound as international trade bounced back, the economy has contracted again.

The tragedy of the earthquake and tsunami brings additional uncertainty.

In fact, the macroeconomic impact forecast by the IMF is quite modest. Slightly slower growth for this year, and slightly faster next year as reconstruction gathers pace.

But Japan does have a serious long-standing problem with its government finances, which is aggravated by the natural disasters.

It has had its credit rating downgraded this year. That, the IMF says, "highlights the importance of having a credible fiscal adjustment plan".

Debt headache

Japan has needed something along those lines for years. The natural disasters make the need more acute, but harder to do.

The reconstruction is likely to be funded to a large extent by the government.

Official estimates of the damage range from 3% to 5% of annual national income.

The deficit in the government's finances is forecast by the IMF to be close to 10% as it is, with gross national debt expected to climb from an already astronomical level of 220%.

Which means, in the IMF's view, that once the extent of the damage is clearer and reconstruction is under way, Japan "will need a more credible fiscal strategy that brings down the public debt ratio over the medium term while addressing the need for additional reconstruction spending".

Doing that will be a very tall order.

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