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Japan debt rating would be harmed by consumption tax cut: Fitch

  • August 25, 2020
  • , Nikkei Asian Review , 5:39 p.m.
  • English Press

MITSURU OBE, Nikkei staff writer

 

TOKYO — Fitch ratings analysts warned on Tuesday that Japan’s single-A debt rating would be negatively affected if the country reverses the consumption tax increase it implemented last October, with the country’s debt outlook now leaning toward negative.

 

Reversing last year’s tax increase would be “potentially harmful,” said Stephen Schwartz, Asia-Pacific head of sovereign ratings at Fitch in an online media conference. He noted that Japan is already the most indebted country among the developed world, with the ratio of public debt to gross domestic product at over 230%.

 

Fitch expects this to hit 259% this year as the government of Prime Minister Shinzo Abe has pursued aggressive fiscal measures to support an economy hammered by the coronavirus. On Aug. 7, the government approved expanding a program to subsidize struggling small businesses.

 

Schwartz said that the tax hike — from to 8% to 10% — has helped lower the debt trajectory in the medium term. “Any reversal of that would have a negative impact potentially on the credit outlook because it would make the challenge of stabilizing and reducing the debt ratio all the more challenging.”

 

Revoking the tax increase is an idea that has been floated among politicians as a way to boost not just private consumption, but also the prime minister’s popularity.

 

Schwartz expects that it would be very difficult to table a tax increase once it has been reversed, given how unpopular the tax hike was in the first place, even if it is necessary to shore up a widening social security budget amid the rapidly aging population.

 

Japan’s economy has been battered by the coronavirus. The economy shrank 7.8% in April-June from January-March — the biggest economic decline in postwar history — as people stayed home and many stores were forced to halt operations.

 

The economy is expected to rebound in July-September, but recovery has not been smooth, hampered by sporadic waves of COVID-19 cases.

 

Fitch expects the Japanese economy will not regain pre-crisis levels until the fourth quarter of 2021.

 

Adding to the uncertainty is Abe’s health. The prime minister just visited the hospital for the second time in as many weeks. Abe suffers from an inflammatory bowel disorder, which forced him to quit as prime minister in 2007.

 

Abe is widely expected to call a general election before the lower house ends its four-year term in October 2021.

 

“Broad policy continuity is likely,” Schwartz said about what to expect under a new Japanese leader. “We sense within the ruling party — which still retains a commanding lead in the most electoral polls — there is a strong sentiment toward fiscal sustainability and eventually bringing the debt ratio down.”

 

Japan is not the only Asian country facing the risk of debt downgrade.

 

Most at risk of downgrade are lower-rated economies that entered the pandemic with high public debt, Schwartz said. Among them is Malaysia, rated A-minus with a negative outlook. It is struggling with a relatively high debt ratio and a collapse in oil prices earlier this year.

 

India, at BBB-minus with a negative outlook, has a high debt ratio of around 70% of GDP, as it struggles to deal with a surge in coronavirus cases, a weak financial sector, and tanking output, Schwartz said.

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