Third de­lay in sched­uled tax hike won’t trig­ger debt rat­ing down­grade

New Straits Times - - Business -


ATHIRD de­lay in Ja­pan’s sched­uled sales tax hike alone won’t trig­ger a down­grade of the coun­try’s sov­er­eign debt rat­ing as long as the gov­ern­ment forms a cred­i­ble fis­cal con­sol­i­da­tion plan, said Fitch Rat­ings di­rec­tor Mervyn Tang.

Tang said the Bank of Ja­pan’s next move would likely be to tighten mone­tary pol­icy, though it would not come for at least another two years, given sub­dued in­fla­tion and wage growth.

“Con­sump­tion tax is one mea­sure for tight­en­ing fis­cal pol­icy, but there are also so­cial se­cu­rity ex­pen­di­tures to be man­aged. There are a num­ber of other mea­sures the gov­ern­ment can take,” said Tang on the side­lines of the Asian Devel­op­ment Bank’s an­nual meet­ing, here. “What we care about ul­ti­mately is that the fis­cal con­sol­i­da­tion strat­egy Ja­pan comes up with is cred­i­ble.”

Ja­pan has twice de­layed a plan to raise the sales tax to 10 per cent from eight per cent, af­ter an ear­lier hike from five per cent hurt con­sump­tion and growth.

Prime Min­is­ter Shinzo Abe has said he would pro­ceed with the tax hike in Oc­to­ber 2019, though some an­a­lysts say he may scrap the plan to pri­ori­tise growth over fis­cal dis­ci­pline.

Tax hikes and spend­ing cuts are con­sid­ered cru­cial to curb Ja­pan’s huge pub­lic debt which, at twice the size of its econ­omy, is the worst among ad­vanced economies.

Tang said the gov­ern­ment faced a dif­fi­cult balanc­ing act of achiev­ing long-term fis­cal con­sol­i­da­tion while spurring eco­nomic growth and erad­i­cat­ing Ja­pan’s de­fla­tion­ary mind­set.

The key to Fitch’s rat­ing for Japanese sov­er­eign debt was whether the econ­omy can shift to a self-sus­tained re­cov­ery cy­cle af­ter sup­port from fis­cal stim­u­lus dis­si­pates.

“One of the ar­gu­ment the gov­ern­ment has for fis­cal stim­u­lus is that it wants growth to be­come self-sus­tain­ing and lead to in­creases in wages, con­sump­tion and busi­ness con­fi­dence. That’s what we need to see,” he said.

“The risk is that there is no in­her­ent self-sus­tained re­cov­ery,” he said, adding that Fitch might re­view its rat­ings out­look if growth in wages, in­fla­tion ex­pec­ta­tions and con­sump­tion turned out to be weaker than ex­pected.

Fitch last month re­vised its out­look on Ja­pan’s sin­gle “A” sov­er­eign debt rat­ing to “sta­ble” from “neg­a­tive”, cit­ing an im­prov­ing eco­nomic out­look driven by ro­bust ex­ports, a tight­en­ing labour mar­ket and higher pub­lic in­vest­ment. Reuters


Fitch Rat­ings last month re­vised its out­look on Ja­pan’s sin­gle ‘A’ sov­er­eign debt rat­ing to ‘sta­ble’ from ‘neg­a­tive’, cit­ing im­prov­ing eco­nomic out­look.

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