HONG KONG, July 13 (Reuters) – Japan’s ruling party’s poor showing at Sunday’s elections will make it more difficult for the country to push through fiscal consolidation and a delay in a credible plan beyond the year-end would increase the risk of a rating downgrade, Fitch Ratings said on Tuesday.
Prime Minister Naoto Kan’s ruling coalition suffered a major blow in Sunday’s upper house election, putting his policies to deal with the country’s massive debt at risk. [ID:nTOE66B066]
“If we don’t see a credible plan come through by the end of the year, it will send a negative signal for its rating, adding pressure to the credit rating,” Andrew Colquhoun, Fitch’s sovereign analyst for Japan, told Reuters.
Fitch has rated Japan’s foreign currency debt AA and its local currency debt at AA-minus, both with a stable outlook.
However, Colquhoun said he was not pessimistic about the government’s ability to draw up such a plan and said the public had not turned its back on fiscal consolidation as a policy objective.
“The election will make it more difficult for the government to draw up and implement such a plan, but I am not too pessimistic as I do not read the election results as a rejection of fiscal consolidation,” he said.
This was reflected in the better showing by the main opposition Liberal Democratic Party (LDP), which has said that Japan should raise the 5 percent consumption tax to 10 percent, he said.
In Sunday’s upper house poll, Prime Minister Naoto Kan’s ruling Democratic Party of Japan (DPJ) won 44 seats and its tiny coalition partner none, losing their majority in parliament’s upper house. That was fewer than the 51 seats won by the LDP.
Rival rating agency Standard & Poor’s has warned it might cut Japan’s sovereign grade as the ruling party’s mauling in a weekend election posed new hurdles for Kan’s plans to cut public debt.
Colquhoun said Japan’s rating was under pressure in the medium term from a declining domestic savings rate and this was reflected in the recent pension fund selling of Japanese government bonds (JGB).
Japanese public pensions turned net sellers of JGBs for the first time in nine years in the fiscal year that ended in March, the Nikkei business daily said on Tuesday.
Japan’s outstanding public debt is the largest among industrial nations, approaching twice the size of its gross domestic product, so any indication that there will be less investment flows into JGBs could be a worry.
But Colquhoun said there was no financing pressure in the near term as the domestic savings rate was still positive and resources were being generated for JGB purchases.
“The banking system, pension funds and insurance companies all have a strong appetite for JGBs, but there is a risk in the medium term,” he said. (Reporting by Umesh Desai; Editing by Jacqueline Wong and Jonathan Hopfner)