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Moody's Investors Service has said that Prime Minister Shinzo Abe's announcement that he will postpone an increase in the consumption tax rate due to take effect in April next year is "credit negative" for Japan's A1 debt rating.
Japan's eight percent consumption tax rate was originally programmed to increase to 10 percent in October 2015 but it will now not take place until October 2019 at the earliest. Abe has also indicated that the Government will introduce additional fiscal stimulus measures later this year to counteract continuing economic uncertainties.
In a statement, Moody's commented that "the combined move is credit negative as it raises further questions over the Government's ability and willingness to meet its stated fiscal consolidation goals. By delaying the tax hike, we estimate the administration will forego additional revenues worth around one percent of gross domestic product per year. The stimulus will constitute a further unknown cost."
It added that the Government's actions "will likely prevent Japan from meeting its fiscal targets, which looked optimistic even before the announcement of the delay." Additional revenue will still be needed to maintain the country's social security programs and to fulfill the promise of eliminating Japan's primary fiscal deficit by 2020.
"The latest change of plan illustrates the scale of the challenge Japan's Government faces in achieving its fiscal objectives," Moody's concluded. "While the decision to defer the consumption tax rise does not yet indicate an outright departure from those fiscal consolidation plans, it casts doubt over the Government's commitment to them, given the increasingly apparent tension between its fiscal and economic objectives."
Fitch Ratings is also reported to have expressed some concern over the delay to the tax rate increase, as it could erode confidence in the Government's dedication to its fiscal consolidation targets. However, Fitch is likely to await details of the Government's future fiscal plans before taking any action on Japan's credit rating.
On the other hand, in an interview with CNBC, Kim Eng Tan, Senior Director of Sovereign Ratings at S&P Global Ratings, was more understanding of Abe's decision to postpone the tax rate increase. He said it "doesn't spell the end of efforts by the Government at fiscal consolidation," as the hike will still occur when Japanese economic conditions have improved. Until then, Japan's "fiscal performance is unlikely to weaken."
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