Fitch Sees Risk in Japan Relying on Growth for Debt Reduction

Fitch Ratings Ltd. said Japan’s increasing reliance on economic growth to cut its debt burden exposes the nation to greater risks.

Relying on growth as the “primary engine of fiscal stabilization is riskier” than focusing on reducing deficits and government borrowing, Andrew Colquhoun, Fitch Ratings’ head of Asia-Pacific sovereign ratings, said in an interview in Tokyo on July 21. The government’s target of a primary budget surplus five years from now “is a bit of a tall order,” he said.

Japan wants to cut a debt burden that is more than twice the size of the economy, without damaging growth by moving too rapidly with spending cuts or tax hikes. It has a long way to go, with even the cabinet office on Wednesday acknowledging that it can’t see Japan achieving a surplus by the fiscal year starting in April 2020.

Fitch, which cut Japan’s debt rating to the same level as Israel and Malta in April, doesn’t expect any more downgrades at the moment, with the stable outlook having a lifespan of 18 to 24 months, Colquhoun said.

“Further negative action on the rating would reflect less confidence on our part that the government remained committed to fiscal consolidation,” Colquhoun said. “The consumption tax increase in April 2017 is an important litmus test of that commitment.”

Japan’s primary budget deficit will be 6.2 trillion yen ($50 billion) in the year starting in April 2020, smaller than a February projection but still not the surplus the government is aiming for. This is based on an assumption of 2 percent real growth in the mid-to-long term, a forecast that is “highly unlikely” to be realized, Colquhoun said.


The government has emphasized the importance of growth over austerity, with Japanese Economy Minister Akira Amari pointing to the turmoil in Greece as “proof that you can’t fix finances by just raising taxes and cutting spending without increasing tax revenues by restoring the economy.”

“There is no fiscal reform without economic revitalization,” Amari said on July 2. “Without continuing to steadily boost growth and increasing the size of the economic pie, just hiking taxes and cutting spending would leave us squirming.”

The reflationary policies of Prime Minister Shinzo Abe have boosted corporate profits by weakening the yen, and as a result tax revenue last year was the highest since 1993. Even so, a sales-tax increase in April 2014 pushed the nation into a recession and prompted Abe to postpone another planned increase until April 2017.

BOJ Limits

The feasibility of the Bank of Japan’s asset purchases may be approaching their limits, and the central bank may be “running out of road” for its easing policy, Colquhoun said.

“There’s probably a wider recognition that we are approaching the limits of what’s doable through the monetary policy route,” he said. “Growth in the last two years has received a significant cyclical kick from the policy easing, but that can’t last for ever.”

The nation needs stronger wage growth to create self-sustaining inflation and positive momentum for the budget and debt, Colquhoun said. Pay adjusted for inflation hasn’t risen for 25 months, according to the labor ministry.

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