Fitch cut its outlook for Japan Monday, citing Tokyo's decision to postpone a sales tax hike seen as critical to paying down one of the world's largest national debts. The company said it was changing its view to negative from stable but left Japan's "A" credit rating unchanged after downgrading the heavily indebted country last year. Delaying the tax rise undermined Japan's commitment to paying a debt mountain that has grown to more than twice the size of an economy, Fitch said.
"The outlook revision primarily reflects Fitch's decreased confidence in the Japanese authorities' commitment to fiscal consolidation," it said yesterday. "The consumption tax increase was an important element in the government's" budget plans.
Fitch also said Tokyo had not supplied details about how it would make up for revenue lost by not boosting the tax rate to 10 percent from the current 8 percent. However, the agency noted that stable, wealthy Japan still had plenty of funding options.
Much of the country's debt is held domestically at low interest rates that have allowed the country to avoid a Greek-style cash crunch. But a loss of confidence in Tokyo's ability to pay its debts could send interest rates soaring and increase the risk of a bankruptcy.
Japanese Prime Minister Shinzo Abe had repeatedly said he would follow through on the tax hike, planned for 2017, after it was already delayed once. But this month he said raising the sales tax would be pushed back more than two years to late 2019, when he is likely no longer in office. That means the tough job of raising taxes will be pushed onto his successor.
Abe insisted that postponing the rise would give Tokyo some room to breathe new life into a faltering growth plan dubbed "Abenomics" - a mix of big government spending, monetary easing and economic reforms. Japan's last sales tax rise in April 2014 was blamed for pushing the country into a brief recession. There were widespread fears another hike would hammer the world's third largest economy by taking a bite out of consumer spending.
Japan's economy grew 0.5 percent in the first quarter, or 1.9 percent at an annualized rate, dodging recession, but there are widespread concerns about the strength of its recovery.