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Moody's Downgrades Japan On Tax Hike Delay

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

02 December 2014


Moody's Investors Service has downgraded Japan's debt rating from A1 from Aa3, and cited, as a key driver in its decision, the increased uncertainty over the country's fiscal deficit reduction targets being reached, following the announcement of a delay to April 2017 in a further consumption tax hike.

Moody's noted that "the consumption tax increase on April 1, 2014 [to eight percent from five percent] has exerted even more powerful downward pressure" on demand in the Japanese economy, but that the Government's response had been to "announce a delay in the second step in the consumption tax increase [by another two percent to ten percent]."

This, it added, "appears to represent a shift in policy towards stemming re-emerging deflationary pressures on economic growth and away from near-term fiscal deficit reduction," such that reaching the Government's "long-term target of a primary balance surplus by 2020 will be even more challenging."

Moody's stated that, although the Japanese Government is aware that "additional, but as yet unidentified, economic and fiscal reforms will be needed for Japan to achieve its primary balance target in the second half of this decade, … the postponement of the second stage of the increase in the consumption tax has resulted in the delay of the 2015 budget and a concrete plan to meet fiscal targets is not likely to emerge until the second half of 2015."

It stressed that "the trajectory of government debt, projected at 245 percent of gross domestic product in 2014 according to the IMF, will only start to decline under the most favorable combination of economic and fiscal reforms, including tax and social security system reforms."

However, despite the one-notch downgrade, Moody's has given Japan's rating a stable outlook going forward, believing it "is well positioned for the next twelve to eighteen months."

Factors that the agency forecasts could "prompt a negative rating action include significant divergence from the path toward achieving fiscal targets," while it would "consider a positive rating action if Japan were to implement policies that we concluded were likely to restore economic momentum and improve prospects for significant fiscal consolidation and debt reduction."

TAGS: tax | economics | value added tax (VAT) | sales tax | fiscal policy | budget | tax rates | social security | Japan

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