Japan Downgraded By S&P, Likely To Miss Tax Target

by Mary Swire, Tax-News.com, Hong Kong

03 May 2002

Analysts warned on Thursday that Japan is likely to miss a target for tax revenue in 2002, and suggested that a large shortfall would exacerbate the country's already grim economic situation.

The AFP news agency revealed yesterday that the government's cumulative tax revenue estimate was down 2.7% to 37.8 trillion yen, although the final figures will not be announced until June, in order to take account of a May deadline for tax payments from businesses which close their books in March.

Japan Research Institute economist, Hideki Matsumura told the news service that if the gap between the estimate and the actual collection is larger than expected, interest rates could rise, and stock prices fall, adding to Japan's economic woes.

Some experts have suggested that tax increases are part of the answer to the country's problems. However, with the economy still so weak - despite recent signs of possible recovery - this strategy could very easily backfire.

The Japanese government was outraged earlier this week when the Standard & Poor's ratings agency downgraded the country's sovereign credit rating. S&P lowered Japan's debt-issuer status to below that of Italy, putting it on a par with the Czech Republic, and causing the Japanese government to question the fairness of the ratings system.

According to reports, critics of the move cited the ratings agency's failure to downgrade Germany when its economy suffered negative growth following reunification, or Britain when it fell into recession during the 1980s, as examples of a possible bias against Japan.

Indeed, the Japanese Vice Minister for International Affairs, Haruhiko Kuroda was moved to write to Standard & Poor's earlier this week, arguing that: 'Your explanations regarding rating decisions are mostly qualitative in nature and lack objective criteria, which invites questions about the reliability of the rating itself.'

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