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Fitch has slashed Japan’s sovereign rating from A plus to A, judging the world’s fourth-largest economy a worse credit risk than Malta or Estonia.
The credit rating agency said it acted because the government of Shinzo Abe did not offset the lost revenue from last year’s delay in raising consumption tax.
The downgrade is unlikely to have much immediate effect — domestic confidence in Japan’s public debt has survived bigger shocks — but it highlights a steady deterioration in the country’s public finances at a time when the central bank has embarked on an unprecedented Y80tn ($670bn) a year bond-buying programme.
An A is the sixth notch on Fitch’s rating scale. That puts it one notch below Moody’s, which downgraded Japan late last year, and two notches below Standard & Poor’s.
“Japan’s main sovereign credit and rating weakness is the high and rising level of government debt,” said the agency. “Fitch projects the gross general government debt-to-GDP [gross domestic product] ratio to rise to 244 per cent of GDP by end-2015, by far the highest ratio of any rated sovereign.”
Japan’s public debt has increased rapidly over the past 20 years as social security spending rose, tax revenues stagnated and successive governments used fiscal stimulus to try and revive growth.
The government has been able to draw on a large pool of domestic savings, however, financing itself at extremely low interest rates. That means it has never come close to a debt crisis despite repeated predictions.
Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch, said the rating reflected the extremes of Japan’s position: weak public finances and economic growth combined with a strong polity and little external debt.
“The Japanese sovereign’s exceptionally strong financing flexibility supports the ratings, despite weaknesses and vulnerabilities elsewhere in the public finances,” said Fitch.
“Sovereign funding flexibility rests mainly on the massive stock of savings of the Japanese private sector and the strong ‘home bias’ with which these savings are invested.”
Mr Colquhoun said Fitch will be looking at a government fiscal consolidation strategy, due this summer, to see whether it puts debt-to-GDP ratios on a downward path.
As important as the strategy itself, he said, will be the government’s commitment to implementing it. Any further delay in raising consumption tax, from 8 to 10 per cent, now scheduled for April 2017, would be a negative.