Japan Rating Cut Rings Alarm on Tax Gridlock

Japan Rating Cut Rings Alarm for Lawmakers Gridlocked on Taxes
A pedestrian walks past the Bank of Japan headquarters in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

Japan’s sovereign-rating cut by Fitch Ratings escalated pressure on lawmakers to double the sales tax, with the Organization for Economic Cooperation and Development warning the nation’s debt is heading into “uncharted territory.”

The local-currency rating was reduced one step, and foreign-currency grade two levels, to A+, the fifth-highest ranking, Fitch said in a statement yesterday. The Paris-based OECD said separately that boosting the 5 percent consumption levy is a “top priority.”

A surge in demand for Japanese government bonds that sent 10-year yields to the lowest level since 2003 this month is masking the risks from rising debt. Prime Minister Yoshihiko Noda has failed to persuade opposition lawmakers to support his legislation, leaving gross public debt poised to reach 223 percent of gross domestic product next year, the OECD said.

“It’s an alarm bell for Japanese politics and the slow progress in Japan’s fiscal consolidation,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo and a former central bank official. “There’s no commitment to fiscal consolidation -- in the long run, Japan’s creditworthiness and fiscal sustainability aren’t looking good.”

Fitch went one step further than Moody’s Investors Service and Standard & Poor’s, which both have Japan on their fourth-highest rankings. Fitch and S&P both have a negative outlook for the nation’s grade.

Yen Drop

The yen weakened 0.8 percent against the dollar yesterday after the announcement, and was little changed today at 79.99 as of 9:49 a.m. in Tokyo.

“The country’s fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk,” said Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch.

Finance Minister Jun Azumi told reporters that he didn’t want to comment on the assessment, while adding that the government will press on with tax and welfare reform to improve finances.

Raising the 5 percent sales tax is a “top priority” and balancing the budget and reducing the public debt burden are “essential,” the OECD said in a report yesterday. Delays in restoring the fiscal health of the world’s third-largest economy could risk a run-up in government borrowing costs, it said.

Yields Falling

So far, Japan’s worsening credit score hasn’t led to a drop in bond prices, with yields on benchmark 10-year debt falling to 0.815 percent on May 18, the lowest since 2003.

Turmoil in Europe has boosted the appeal of Japanese assets as a so-called haven for investors and the nation remains the world’s largest net creditor. Japan’s foreign investments and assets grew to the second-highest level on record in 2011, Finance Ministry data showed yesterday.

“Very strong private sector savings in Japan” help support the sovereign rating, Colquhoun said in an interview with Bloomberg Television in Hong Kong today. Private-sector demand for Japanese government bonds won’t change soon, he said.

Yields “are being kept low by extremely loose monetary policy and safe haven demand,” said David Rea, an economist at London-based Capital Economics. “Japan is not Greece and is unlikely to share a similar fate,” he said, adding that it has “its own currency, independent monetary policy, a relatively strong economy and ample external assets.”

Moody’s, S&P

Moody’s cut the nation one step to Aa3 in August last year, citing the build-up in government debt since the 2009 global recession. S&P lowered Japan to AA- in January last year and said the outlook was “negative” three months later. No comment was immediately available from those companies yesterday.

Japan’s economy grew more than expected in the first quarter as private consumption rose and reconstruction spending boosted public investment. Gross domestic product rose an annualized 4.1 percent from the final three months of 2011, a Cabinet Office report showed May 17.

Bank of Japan officials will today announce whether they will take additional steps to spur growth and counter deflation after the yen rose last week to a three-month high against the dollar, dragging on the nation’s exports. Seven of 14 economists surveyed by Bloomberg News said they expect the central bank to bolster monetary stimulus by July, while none predicted action today.

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