Japan’s progress on structural reform – the so-called ‘third arrow’ of prime minister Shinzo Abe’s programme to revitalise the economy – is crucial for the country to be able to bring its debts under control and continue to fund them at low cost, said Moody’s Investors Service.
The credit ratings agency (CRA) adds that at the same time, Japan’s Aa3 rating and stable outlook are supported by key features that encourage large domestic holdings of government debt and make funding it affordable, even at current extraordinarily high levels.
Moody’s conclusions are contained in its just-released credit analysis on Japan, which examines the sovereign based on economic, institutional and fiscal strength, and susceptibility to event risk.
The CRA notes that since Abe came to office in December 2012, his administration has taken steps to bolster the country’s languishing economy and to start raising fiscal revenues.
Growth and inflation have both picked up, but the sovereign’s creditworthiness will hinge on the government’s ability to sustain economic momentum and rein in its budget deficits. The global financial crisis and Japan’s March 2011 earthquake and nuclear power plant disaster resulted in further debt accumulation on an already exceptionally high level.
In this context, if Abenomics – the popular name given to the government’s economic policies – does not boost growth potential, the latest stimulus steps risk pushing Japan’s debt trajectory even higher, according to the report.
Incomplete progress on reforms could also hurt confidence and drag down the rate of economic activity. Such scenarios would weigh on the government’s creditworthiness as tail risks to debt affordability would rise.
Moody’s further notes that prospects for structural reforms should become clearer in June when the administration is due to set out its growth strategy. Reforms are billed to include measures such as raising female participation in the labor force and competition in the healthcare sector. But, in most cases, the government has yet to announce concrete steps to achieve these goals.
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