FITCH STAYS POSITIVE ON JAPAN OUTLOOK
Third delay in scheduled tax hike won’t trigger debt rating downgrade
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.