Japan Told to Form Fiscal Consolidation Plan

A third 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, Fitch Ratings director Mervyn Tang said on Thursday.

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

“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,” Tang told Reuters on the sidelines of the Asian Development Bank’s annual meeting in Yokohoma.

“What we care about ultimately is that the fiscal consolidation strategy Japan comes up with is credible.”

The government has twice delayed a plan to raise the sales tax to 10% from 8%, after an earlier hike from 5% hurt consumption and growth.

Prime Minister Shinzo Abe has said he will proceed with the tax hike in October 2019, though some analysts say he may scrap the plan to prioritize 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 faces a difficult balancing act of achieving long-term fiscal consolidation while spurring economic growth and eradicating Japan’s deflationary mind-set.

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.