Prime Minister Shinzo Abe’s decision to delay an increase in the sales tax was greeted with understanding by S&P Global Ratings while Fitch Ratings warned that the country risks undermining faith in its efforts to rein in debt.  

“If Japan’s government has decided to delay the consumption tax increase scheduled for April 2017 as reports indicate, it would undermine the credibility of the political commitment to fiscal consolidation,” Andrew Colquhoun, Fitch’s head of sovereign rankings for the Asia-Pacific region, said in an e-mail. “However, Fitch will await further detail on the government’s revised fiscal plans before drawing conclusions for Japan’s ratings."

Fitch in April 2015 lowered the country’s credit rating to A, the same level as Malta and Ireland.

S&P Global Ratings was sanguine. “We don’t see much rating implication,” Kim Eng Tan, a senior director of Asia-Pacific sovereign ratings, said by telephone. “There’s no certain impact on the rating profile or the ratings.”

S&P in September 2015 lowered Japan’s credit rating to A+, the same level as Slovakia and Israel.

Officials at Moody’s Investors Service weren’t immediately available to comment.

Growing Concern

Concerns are growing that Japan isn’t doing enough to bring the world’s heaviest public debt burden under control given worries about the anemic economic recovery. While the government has said it remains committed to fiscal consolidation, some investors are questioning how Japan will fill the revenue hole.

Abe has a long way to go to achieve his primary balance surplus target goal for the fiscal year starting April 2020. The primary balance is calculated by subtracting expenditures excluding interest payments from revenues without bond sales, and is a key measure for the Abe administration as it attempts to control debt.

Even before the sales tax hike was postponed, government estimates showed Japan would have a deficit for this measure.

Based on tax data from the budget for the fiscal year that started in April, the levy delay will mean Japan collects about 4.6 trillion yen ($42 billion) less in tax revenue next year, according to official in Ministry of Finance’s tax bureau, who asked not to be named as person isn’t authorized to speak publicly.

‘Big Headache’

“Japan’s fiscal problem is a big headache for Abe,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole Securities in Tokyo. “Japan’s fiscal situation has to be improved but the economy isn’t strong enough. Some investors are starting to wonder if Japan’s economy can ever become resilient enough to withstand the tax hike.”

Japan’s credit rating has been lowered gradually yet steadily over decades of economic stagnation that have made it difficult to raise revenue. Ballooning costs for social security, welfare and medical care have added to the fiscal woes amid a rapidly aging and declining population.

The market impact of past downgrades of credit ratings has been reduced because most of Japan’s debt is owned by domestic investors, with foreigners holding 10.6 percent at the end December, according to the BOJ. The International Monetary Fund in report estimates Japan’s debt-to-gross domestic product will reach 249.3 percent this year, far larger than any other country.

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