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Fitch: Public Debt to Remain High Under Japan Fiscal Plan
July 6, 2015 / 2:04 AM / 2 years ago

Fitch: Public Debt to Remain High Under Japan Fiscal Plan

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, July 05 (Fitch) A multi-year fiscal plan approved by the Japanese cabinet on 30 June does not increase the likelihood of the country's high public debt ratios beginning to decline in a sustainable and substantive manner any time soon, says Fitch Ratings. The strategy focuses on enhancing growth through structural reforms as the guiding principle for fiscal consolidation. Many of the planned reforms are positive for enhancing productivity and encouraging investment, but Fitch believes that the government's expectations of their effect on growth are highly optimistic. The government's plan targets achieving a primary deficit of 1% of GDP by 2018 on the way to a balanced budget by 2020, through raising potential growth to above 2%. Notably, beyond previously announced plans to raise the consumption tax by two percentage points to 10% in April 2017, the government is relying almost wholly on economic growth to increase tax revenue. At the same time, the central government has not set a hard cap on general spending, though it aims to keep annual increases in general spending to JPY1.6trn through to the fiscal year to March 2018. The lack of a hard cap leaves room for fiscal slippage. The government's plans to control expenditure focus on improving efficiencies through technology, innovation, greater use of the private sector in the provision of public services and reforming incentives, which are broadly positive for long-term efficiency, but are not likely to curb expenditure growth materially over the medium term. The reliance on economic growth for fiscal consolidation comes with risks. The planned consumption tax hike in 2017 is likely to have a negative effect on household spending. If this is larger than expected by the government, it could undermine the fiscal plan's long-term growth assumptions. Furthermore, Japan's primary deficit has narrowed recently, due in part to a cyclical macroeconomic upswing. However, the IMF estimates that the Japanese economy is operating at near-potential. This suggests that the prospects for a further cyclical acceleration in economic growth are limited, and the economy will provide less support to narrowing the primary deficit in future. Judged from a cyclically adjusted basis, Japan's reduction in the primary deficit has been unremarkable relative to other advanced economies. Japan's Foreign- and Local-Currency Issuer Default Ratings were cut to 'A'/Stable from 'A+'/Rating Watch Negative on 27 April. Japan's main sovereign credit and rating weakness is the high and rising level of government debt. Contacts: Mervyn Tang Associate Director Sovereigns +852 2263 9944 Fitch (Hong Kong) Limited 2801 Tower Two, Lippo Centre 89 Queensway Hong Kong Justin Patrie Senior Director Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Related Research Japan here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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