Fitch Ratings said Monday it had downgraded Japan’s credit rating one notch to “A,” citing concerns over the country’s strategy for addressing its high and rising level of government debt.
The downgrade follows a similar move by Moody’s Investors Service and, according to Reuters, “could pressure the [Japanese] government to take tough measures in a fiscal discipline plan that is due sometime around June.”
In December, Moody’s downgraded Japan to “A1,” which is one level above Fitch’s rating, after Tokyo decided to delay a sales tax increase that was the centerpiece of its medium-term fiscal consolidation effort.
Fitch attributed its downgrade in part to “the absence of broadly equivalent fiscal measures to replace the deferred consumption tax increase in the FY15 budget.”
The impact of a corporate tax cut in the budget, Fitch said in a news release, was “broadly neutral overall” because the tax base was broadened, and a supplementary budget for FY14 that was introduced in January “essentially spent an unexpected increase in revenue.”
“These developments increase Fitch’s uncertainty over the degree of political commitment to fiscal consolidation,” the bulletin said, noting that Japan is set to unveil a new fiscal strategy this summer. “The details of the strategy will be important, but the strength of the government’s commitment to implement it will be even more important and will only become clearer over time.”
Japan’s public debt is at twice the size of its economy, and its debt-to-GDP ratio is the worst of any industrialized country. Fitch projects gross general government debt to rise to 244% of GDP by end-2015.
While Fitch expects the ratio to stabilize to about 250% of GDP in 2020, it warned that “the debt dynamics are highly vulnerable to variations in parameters such as economic growth, the budget deficit, or yields.”
Japan hiked its sales tax last spring but the move hurt consumer and business spending as the Japanese economy slipped into a recession. Seeking to avoid a repeat of that scenario, Prime Minister Shinzo Abe decided to delay a sales tax hike to 10% from 8% that had been scheduled for this year.
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