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Japan’s Abe Faces Ratings Pressure on Sales Tax Increase

Japan’s incoming prime minister Shinzo Abe risks action by rating companies unless he implements a sales tax rise to limit the world’s largest public debt.

Failure to raise the sales tax “would be a credit negative development,” Tom Byrne, a senior vice president at Moody’s Investors Service, said in an interview in Tokyo today. Large budget deficits “can’t be continued indefinitely so something will have to give.”

Abe today promised to implement a “large” extra budget to stem the nation’s economic slide, a move that could increase debt that has grown to more than twice the economy’s size. While outgoing Prime Minister Yoshihiko Noda passed a bill this year to raise the sales tax to limit borrowing, Abe said yesterday implementing the increase depends on the health of the economy.

The Liberal Democratic Party-led coalition won a two-thirds majority in yesterday’s lower house election, enabling it to override most decisions of the upper chamber where it holds less than half the seats. Standard & Poor’s would consider “lowering the long-and short-term ratings if the government’s debt trajectory were to remain on its current course,” Elena Okorochenko, managing director and lead analytical manager for Asia-Pacific sovereign ratings at S&P said in an e-mail.

The tax is set to rise to 8 percent in April 2014 and 10 percent in October 2015 from the current 5 percent. Japan’s gross public debt may reach 230 percent of gross domestic product in 2014, the Organization for Economic Cooperation and Development projects.

Budget Deficit

The government projected in August that the primary budget deficit -- which excludes payments on debt -- will be 2.8 percent of GDP in the 2020 fiscal year, short of the targeted surplus even if the sales-tax increase is phased in as planned.

The LDP may unveil between 5 trillion ($60 billion) and 10 trillion yen in extra spending as early as next month, according to Kyohei Morita, chief economist at Barclays Plc in Tokyo. The Nikkei 225 Stock Average rose 0.9 percent in Tokyo today, heading for its sixth week of gains on investor’s expectations for fiscal and monetary stimulus.

Moody’s has an Aa3 rating on Japan, while S&P ranks it at AA-. Fitch Ratings Ltd. downgraded Japan’s sovereign rating in May because of the nation’s “leisurely” efforts to tackle its debt, lowering the long-term, local-currency grade by one step to A+ with a negative outlook.

“In terms of rating triggers, the fiscal consolidation timetable is the key one,” Andrew Colquhoun, Hong Kong-based head of Asia-Pacific sovereigns for Fitch said in a telephone interview today. “The longer the debt keeps rising, the greater the risk of some form of accident.”

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