By Makiko Yamazaki
TOKYO (Reuters) -Fitch Ratings sees fiscal policy as the main risk to Japan’s credit rating, its Japan sovereign analyst said on Wednesday, as calls for aggressive spending and consumption tax cuts intensify ahead of Sunday’s upper house election.
“There has been a trend towards a looser fiscal policy in Japan recently,” with the government seeking to offset the impact of inflation on households through subsidies and other fiscal measures, Krisjanis Krustins, director at Fitch, said in an interview with Reuters.
“Given the recent polling numbers, it looks like that is likely to strengthen after the upper house election,” he said.
Latest media polls show Prime Minister Shigeru Ishiba’s Liberal Democratic Party-led (LDP) coalition will likely lose its majority in the upper house, heightening the risk of political instability.
A defeat of the LDP-led coalition could empower opposition parties that have pledged in their campaign platforms to cut or abolish the 10% consumption tax – a step that fiscal hawk Ishiba has so far resisted. A cut would strain the country’s already tattered finances.
“If Japan adopts tax cuts that are not offset by other policy measures and that don’t lead to much higher growth, basically that leads to higher fiscal deficits and an accelerated debt trajectory. That could certainly put pressure on the rating,” Krustins said.
But he also pointed out there could be some offsetting factors in light of a conservative attitude in the LDP and in the finance ministry, including possible reductions in supplementary budgets to mitigate the impact on state finances.
“If there is to be any change to consumption tax, it’s probably going to be quite nuanced, reflecting this strong resistance by the LDP and fiscal institutions,” he said, noting that the impact will depend on details and the overall policy mix.
Fitch has set its rating for Japanese credit at A, five notches below the top AAA rating, with a stable outlook.
Japan’s debt burden is the highest in the developed world at about 250% of GDP. Concerns about the nation’s post-election fiscal health have already pushed long-dated government bond yields to all-time highs.
But Krustins said the possibility of a big financial market shock in Japan, such as the one triggered by former British Prime Minister Liz Truss’ fiscal plan, “is much smaller than in other developed markets,” due mainly to a large domestic investor base in the government debt market.
He also said that Japan’s effective delay in delivering a primary budget surplus by its timeline of fiscal 2025 would not affect its rating outlook, because Fitch did not expect the target to be reached.
(Reporting by Makiko Yamazaki; Editing by Jacqueline Wong)
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