Japan's Rating Hinges On Tax Reform

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

23 February 2011

The credit rating agency, Moody’s Investors Service, has placed Japan’s Aa2 long-term rating on negative outlook, from stable, advising that it could be reduced in the future if the government is unable to get its tax reform programme through the country’s parliament.

Moody’s has, at least, kept its current rating, which is still one notch above that of Standard & Poor’s (S&P) that cut its rating by one notch to AA- last month, also citing fiscal concerns. S&P had then said that it was concerned that the Japanese government did not have a “coherent strategy” to resolve the country’s fiscal and debt problems, and doubted that the problem would be resolved by the current internal debate on reform.

To reinforce that opinion, Moody’s has pointed out that, if the government fails to get approval for fiscal reform to solve the twin problems of the increasingly high levels of Japan’s public debt and fiscal deficit, any future pressure on Japan’s ratings is bound to be downwards.

Moody’s has noted that the achievement of tax reform will also require government stability, which appears to be progressively more and more unlikely as the political problems of Naoto Kan, Japan’s Prime Minister, appear to increase.

Kan’s fiscal programme, to be introduced by the end of June, revolves around by how much, and when, the government should make a move to increase the country’s 5% consumption tax and finance the increasing costs of social security and pensions in Japan. However, to be approved, it will need the support of opposition parties, after the government lost its majority in the parliamentary upper house last year.

In addition to recent problems within his own Liberal Democratic Party, which itself remains divided on reforms, Kan has been unable to obtain any softening in the attitude of the parliamentary opposition parties who, while refusing to join in any talks on tax reform, are also saying they will now oppose budgetary bills, that need to be approved by the end of March, including one allowing the government to issue further long-term bonds to finance the deficit.

Although Kan is still professing his determination to press ahead with his reform programme, there has been talk of an early election to break the political deadlock. Furthermore, if an election does not take place, there has also been some concern that any fiscal policies that could finally be agreed may be watered-down, and may not be considered sufficient to correct Japan’s fiscal problems in the future.

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