S&P: Large Ja­pan eco­nomic stim­u­lus would raise con­cerns

The Pak Banker - - MARKETS/SPORTS -

Ja­pan's govern­ment is un­likely to be able to launch a stim­u­lus pack­age to sup­port its strug­gling econ­omy with­out rais­ing con­cerns about the size of its spend­ing, rat­ings agency Stan­dard & Poor's said on Wed­nes­day. Faced with a flag­ging econ­omy, Ja­pan is lay­ing the ground­work for new govern­ment spend­ing to pre-empt any weak­ness in house­hold con­sump­tion, which would add to its al­ready heavy debt bur­den.

S&P cut its rat­ing on Ja­pan from AAto A+ in Septem­ber, which is four notches below its top rat­ing of AAA, be­cause it doubts the govern­ment can re­verse the coun­try's eco­nomic de­te­ri­o­ra­tion. The agency also raised its out­look to sta­ble from neg­a­tive.

"The size of any stim­u­lus will have to be care­fully cal­i­brated. At this point I don't think the govern­ment can put out a pack­age big enough to sup­port the econo- my with­out trig­ger­ing con­cerns," Kim Eng Tan, S&P's Asia-Pa­cific se­nior di­rec­tor of sov­er­eign rat­ings, said in an in­ter­view. Tan said con­tin­ued yen strength could re­move the ex­ter­nal sup­port, such as the re­ceipts in­bound tourism bring in, which Ja­pan's bud­get bal­ance en­joys. If do­mes­tic de­mand and in­fla­tion are un­able to make up for the loss of this ex­ter­nal sup­port, the fis­cal bal­ance could again de­te­ri­o­rate and pose a credit neg­a­tive fac­tor in the long run, he added.

"But even in this sce­nario, we are un­likely to change our rat­ing in the next year or two," Tan said.

Ja­pan plans to in­crease its sales tax in April 2017 and that would lift govern­ment rev­enue and lower its out­stand­ing debt bur­den. Spec­u­la­tion has lin­gered among some mar­ket play­ers, how­ever, that Ja­pan could post­pone hik­ing taxes amid wors­en­ing de­mand.

"It re­ally de­pends on the eco­nomic sit­u­a­tion at that time. If you in­tro­duce a con­sump­tion tax hike when the econ­omy is al­ready weak or head­ing down­wards, you are wors­en­ing the eco­nomic trend. You may not bring in that much rev­enue," Tan said. Ja­panese govern­ment bond yields through the 10-year ma­tu­ri­ties have sunk to record lows below zero per­cent un­der the Bank of Ja­pan's neg­a­tive in­ter­est rate pol­icy, in­tro­duced in Jan­uary, po­ten­tially light­en­ing the govern­ment's debt-ser­vic­ing cost.

"In the short term, it can def­i­nitely re­duce the govern­ment's fi­nanc­ing cost, but whether it does so in the long term de­pends on peo­ple's con­tin­ued con­fi­dence in mon­e­tary pol­icy," Tan said. Al­though neg­a­tive yields were un­likely to re­verse any time soon, the phe­nom­e­non could dam­age con­fi­dence in mon­e­tary pol­icy by hurt­ing the fi­nan­cial sec­tor and even­tu­ally re­sult in an out­flow of cap­i­tal," Tan said.

"At that point, the pol­icy rates may still be neg­a­tive, but I don't think longterm yields will be neg­a­tive."

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