World Economy

Fitch Says Japan Fiscal Stability Still Within Reach

Fitch Says Japan Fiscal  Stability Still Within ReachFitch Says Japan Fiscal  Stability Still Within Reach

A delay in Japan’s planned increase to its sales tax could have negative implications for the country’s sovereign debt rating, an official at Fitch Ratings said on Monday.

There have been discussions in Japan’s parliament recently over whether to delay the sales tax hike scheduled for April 2017, Reuters reported.

“We’re not in the business of giving policy advice,” Andrew Colquhoun, head of Asia-Pacific sovereign rating at Fitch, said in a phone interview. “But what I would say is that if the sales tax increase didn’t happen, without other equivalent fiscal consolidation measures, the deficit would be higher, the debt would be rising faster than we currently expect, and that would be credit-negative, and could result in a negative rating action.”

Japan’s central bank is expected to cut its economic and price forecasts for next fiscal year at a quarterly review in April, sources familiar with its thinking say, as weak global demand hits growth and yen rises weigh on imported fuel costs.

The gloomy assessment comes even after the Bank of Japan attempted to forestall risks of an economic downturn by adopting negative interest rates in January, underscoring the fragile nature of Japan’s recovery.

A change in the BOJ’s baseline expectations for the fiscal year ending March 2017 may prompt the central bank to offer a bleaker view on exports, output and the economy when its board meets next week than it did in January.

In April 2015, Fitch cut its rating on Japan after the government failed to take steps to offset a delay in a sales tax increase. It cut by one notch to A, which is five notches below the top AAA rating, with a stable outlook.

 Sales Tax

Japanese Finance Minister Taro Aso said on Friday that Prime Minister Shinzo Abe will implement the planned hike next year unless Japan were to experience a financial crisis or a natural disaster.

Abe’s decision in late 2014 to delay a sales tax hike to 10% from 8% that had been scheduled for 2015 made it more difficult for Japan to eliminate the primary budget deficit in fiscal 2020, an important fiscal consolidation target.

The Japanese government is also laying the groundwork for new stimulus spending, which would add to the country’s already heavy debt burden. The country’s debt-to-GDP ratio is the highest among industrialized countries.

Despite the risks, Colquhoun said it remains possible for Japan to get its fiscal act together.

“We think that Japan is only around 2 percentage points or so away from a deficit that would stabilize the debt-to-GDP ratio, in our baseline, but there’s a lot of moving parts in our forecasts,” he said, adding, “fiscal stabilization is not out of reach.”

Japan’s ample domestic savings have helped the country finance most of the debt so far.

“The sovereign’s exceptional funding flexibility has long been one of the strengths in the credit profile despite high level of government debt and the deficit,” Colquhoun said.

 JGBs Little Changed

Japanese government bond yields through 10-year maturities have sunk to record lows below 0% since the Bank of Japan unveiled its negative interest rate policy on Jan. 29, potentially lightening the government’s debt-servicing cost in the short-term.

However, Colquhoun said neither Fitch nor Japanese policymakers expect artificially low yields to play an integral part of Japan’s fiscal stabilization.

JGBs were little changed on Monday, with softer Tokyo stocks helping offset downward pressure from a fall in US Treasuries.

The benchmark 10-year JGB yield inched up half a basis point to minus 0.035%. March 10-year futures were up 0.01 point at 151.88.

The JGB market showed little reaction to comments from Bank of Japan chief Haruhiko Kuroda, who said the central bank will scrutinize the impact of negative rates on the money market and that he wanted to dispel concerns that quantitative and qualitative easing cannot be expanded further.