World Economy

Japan Plan Unlikely to Lower Debt Burden

Japan Plan Unlikely to Lower Debt BurdenJapan Plan Unlikely to Lower Debt Burden

Japan’s public debt burden is likely to remain high under a new fiscal framework approved last month as the government’s structural reforms will not boost economic growth and tax revenue significantly, Fitch Ratings said on Monday.

Japan’s fiscal plan relies almost entirely on achieving high economic growth to increase tax revenue, but there is little room for the economy to accelerate further as it is already near its potential growth rate, Fitch said in a statement, Reuters reported.

A lack of binding spending targets in the government’s plan also leaves room for spending to rise even further, the ratings agency said.

A loss of fiscal discipline could harm Japan’s economy by putting upward pressure on bond yields and complicates the Bank of Japan’s purchases of government debt under its quantitative easing program.

 “The strategy focuses on enhancing growth through structural reforms as the guiding principle for fiscal consolidation,” Fitch said in a statement.

 “Many of the planned reforms are positive for enhancing productivity and encouraging investment, but Fitch believes that the government’s expectations of their effect on growth are highly optimistic.”

Fitch Ratings downgraded Japan’s credit rating in April by one notch to A, which is five notches below the top AAA rating, after the government failed to tighten fiscal spending to offset a delay in a sales tax increase. The outlook is stable.

Japan’s new fiscal guidelines approved last month maintained an earlier target of returning to a primary budget surplus in fiscal 2020 and then lowering the debt-GDP ratio, which is the worst in the world at around twice the size of Japan’s $5 trillion economy.

The government also said it would try to limit annual spending growth to ¥1.6 trillion ($13.05 billion) for the next three years but said this could change depending on the economy.

Japan’s government aims to keep GDP growth above 2% in real terms and 3% in nominal terms with reforms designed to encourage investment in robotics, IT and increase productivity.

However, the government’s expectations for the economic impact of these measures is “highly optimistic,” Fitch said.