YOKOHAMA, Japan (Reuters) - A third delay in Japan’s scheduled sales tax hike alone won’t trigger a downgrade of the country’s sovereign debt rating as long as the government forms a credible fiscal consolidation plan, Fitch Ratings director Mervyn Tang said on Thursday.
Tang also said the Bank of Japan’s next move will likely be to tighten monetary policy, though it will not come for at least another two years given subdued inflation and wage growth.
“Consumption tax is one measure for tightening fiscal policy, but there are also social security expenditures to be managed. There are a number of other measures the government can take,” Tang told Reuters on the sidelines of the Asian Development Bank’s annual meeting in Yokohoma, eastern Japan.
“What we care about ultimately is that the fiscal consolidation strategy Japan comes up with is credible.”
Japan’s government has twice delayed a plan to raise the sales tax to 10 percent from 8 percent, after an earlier hike from 5 percent hurt consumption and growth.
Prime Minister Shinzo Abe has said he will proceed with the tax hike in October 2019, though some analysts say he may scrap the plan to prioritize growth over fiscal discipline.
Tax hikes and spending cuts are considered crucial to curb Japan’s huge public debt which, at twice the size of its economy, is the worst among advanced economies.
Tang said the government faces a difficult balancing act of achieving long-term fiscal consolidation while spurring economic growth and eradicating Japan’s deflationary mindset.
The key to Fitch’s rating for Japanese sovereign debt was whether the economy can shift to a self-sustained recovery cycle after support from fiscal stimulus dissipates.
“One of the argument the government has for fiscal stimulus is that it wants growth to become self-sustaining and lead to increases in wages, consumption and business confidence. That’s what we need to see,” he said.
“The risk is that there is no inherent self-sustained recovery,” he said, adding that Fitch may review its ratings outlook if growth in wages, inflation expectations and consumption turn out to be weaker than expected.
Fitch last month revised its outlook on Japan’s single A sovereign debt rating to stable from negative, citing an improving economic outlook driven by robust exports, a tightening labor market and higher public investment.
The revision also reflected the diminishing risk of the BOJ being forced to deploy extreme monetary easing steps, such as direct bank-rolling of government debt, it said.
Tang said Japanese policymakers are making some progress in boosting public confidence in the economy and generating a tight labor market that should eventually feed through to wages.
“The problem with confidence is it’s inherently quite fragile, and it gets more fragile the longer the economy remains weak,” Tang said.
After three years of heavy asset buying failed to boost inflation, the BOJ shifted to a policy better suited for a long-term battle against deflation that targets interest rates rather than the pace of money printing.
Reporting by Leika Kihara; Editing by Sam Holmes