Moody Investors Says Japan's Fiscal Strategy Supports Aa2 Sovereign Rating

Japan’s plan to restore fiscal health supports the stable outlook on the country’s Aa2 credit rating, though the government will need to provide more details on how to achieve its goals, Moody’s Investors Service said.

“A fleshing out of its details and demonstrated progress in performance during the next year will be needed to maintain market confidence,” Thomas Byrne, senior vice president at Moody’s, said in a statement released today.

Prime Minister Naoto Kan last week unveiled a plan to balance the budget in 10 years, reduce bond sales and cap spending to contain the world’s largest public debt. The government also said it would overhaul taxes “soon.”

Japanese government bond yields have fallen since the strategy was released on June 22. The yield on the benchmark 10- year bond dropped 4 basis points today to 1.098 percent.

“The initial market reaction has been positive,” Singapore-based Byrne said. “Where Mr. Kan’s road map is weak is in its lack of specificity in terms of the timing, form and degree of revenue and expenditure measures, as well as in its long duration.”

Byrne said Japan’s debt rating is underpinned by local demand for government securities, citing that 94 percent of the nation’s bonds are held by domestic investors. The banking sector will support the “stable domestic-market funding base,” he said, while adding that “there may be little margin for error in implementation, or for downside surprises from a fragile global economy.”

Fitch Ratings said in a separate statement today that Japan’s fiscal plan “risks appearing leisurely given the sheer size of the debt stock and may not do enough to head off the longer-term build up of risks for Japan’s public finances.”

The strategy contains “no specific information on the balance of tax increases against spending cuts, or which budget items will be changed,” Fitch said, without commenting on Japan’s AA- credit rating. It expects more details to be provided after upper house elections on July 11.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Benjamin Purvis at bpurvis@bloomberg.net

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