Japan’s central bank on Tuesday downgraded its economic forecast for the current fiscal year, saying the world’s third largest economy will likely shrink by four-tenths-of-one-percent because of the global economic downturn.

The Bank of Japan had earlier predicted the country’s gross domestic product would rise by three-tenths-of-a-percent in the year ending March 31st. It now says Japan’s recovery may be delayed until fiscal year 2012, when it predicts GDP to increase by two percent.

Bank officials said the European debt crisis remained the biggest threat to Japan’s tsunami- and earthquake-shattered economy.

However, the bank did not announce any major policy moves, keeping steady its zero interest rate policy.

Immediately following the announcement, Japanese Prime Minister Yoshihiko Noda called on parliament to reduce Japan’s massive budget deficit by reforming the country’s tax and social security systems.

Prime Minister Noda said Japan’s national debt, which now stands at twice the size of its GDP, must be dramatically reduced in order to avoid the sort of debt crisis that is affecting governments in Europe.

“As global financial markets directly affect our economy, damage is irreversible once a nation’s credibility is lost. We’ve already seen examples in Europe. We cannot wait any longer to implement comprehensive reform.”

Mr. Noda said he would soon submit a plan to double the country’s consumption tax to 10 percent by 2015. But the proposal faces fierce opposition from some within his party, opposition members, and much of the general public.

On Tuesday, Mr. Noda proposed a plan to allow tax breaks and other measures that would lessen the impact of the tax hike on lower-income citizens.

But opposition members have so far showed no sign of compromise, with some even calling for an early election in order to get the public’s mandate on raising taxes.