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Japan downgraded by Fitch

Japan has seen its long-term foreign and local currency issuer default ratings downgraded to A+ with negative outlooks over concerns of high rising public debt ratios.

The long-term foreign IDR was downgraded from AA, while the local currency IDR was downgraded from AA-.

Fitch head of Asia-Pacific sovereigns Andrew Colquhoun says: “The downgrades and negative outlooks reflect growing risks for Japan’s sovereign credit profile as a result of high and rising public debt ratios.

“The country’s fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk.”

According to Fitch, gross government debt is expected to reach 239 per cent of GDP by the year’s end, “by far the highest for any Fitch-rated sovereign”.

The agency warns Japan’s fiscal management strategy forecasts declines in the government debt/GDP ratio from full-year 2021, which it regards as a slow pace of consolidation in view of the scale of the debt.

The agency believes the debt consolidation strategy is also subject to political risk, with a highly controversial hike in consumption tax as its key revenue-raising plan.

However, the agency highlighted several strengths for Japan, including “exceptional financing flexibility” with the ability to fund itself at low yields. It also highlighted public sector support for government debt, the deep pool of private sector savings, and the yen as a global reserve currency.

Yet, it warned private sector savings could contribute to deflation issues. It also highlighted its ageing population as a structural weakness.

“A lack of new fiscal policy measures aimed at stabilising public finances amid continued rises in government debt ratios could lead to a further downgrade,” the agency writes.

“A shock to Japan’s sovereign funding conditions such as a steep and sustained rise in yields would be strongly negative for the ratings, although Fitch does not consider this likely.

“Conversely, progress on fiscal stabilisation beyond Fitch’s expectations could see the outlooks revert to stable. Markedly stronger economic growth than Fitch expects for a sustained period would be constructive for public debt sustainability and could see the outlooks revert to stable.”

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