* Fitch sees Japan’s economy to shrink by 5% in 2020
* Bigger fiscal deficits will add to Japan’s public debt
* Fitch’s move is alarming sign - analyst (Adds economist comment in 11th-12th paragraphs)
July 29 (Reuters) - Rating agency Fitch on Wednesday lowered its outlook on Japan’s long-term foreign currency debt rating to negative from stable, citing the heavy blow from the coronavirus crisis and rising public debt as policymakers try to get the economy back on track.
“The coronavirus pandemic has caused a sharp economic contraction in Japan, despite the country’s early success in containing the virus,” Fitch said.
The global rating agency affirmed Japan’s rating at ‘A’.
Japan’s economy is expected to have contracted sharply in the second quarter as the coronavirus crisis hit global demand and a national state of emergency from mid-April to late May slowed consumer and business activity.
Although the government has lifted the emergency status, a recent jump in new infections could put renewed pressure on the economy.
Fitch projects the world third-largest economy to shrink by 5% in 2020 and to rebound to 3.2% growth in 2021.
Japan’s fiscal support and an expected recovery in external demand should help the economy to return to quarterly growth in the second half of 2020, Fitch said.
But it also expects bigger fiscal deficits in 2020 and 2021 would add significantly to public debt.
“The negative outlook reflects that the higher debt ratio and downside risks to the macroeconomic outlook will nevertheless exacerbate the challenge of placing the debt ratio on a downward path over the medium term,” Fitch said.
The government has rolled out stimulus spending worth $2.2 trillion to respond to the coronavirus crisis but analysts say the huge public debt constrains its ability to ramp up fiscal spending to spur growth.
“The markets see the Bank of Japan will continue to buy government bonds if needed so that interest rates won’t spike,” said Mari Iwashita, chief market economist at Daiwa Securities.
“But Fitch’s move is an alarming sign for Japan’s fiscal spending.”
The rating agency also expects the Bank of Japan will keep its interest rate settings under its yield-curve control framework till at least the end of 2022.
“We believe the BOJ views interest rate cuts as part of its arsenal for potential further easing, but that it will refrain from doing so because of the impact that further rate cuts into negative territory would have on bank profitability,” Fitch said.
S&P Global Ratings last month lowered its outlook on Japan’s sovereign debt rating to stable from positive. (Reporting by Bhargav Acharya in Bengaluru and Kaori Kaneko in Tokyo; Editing by Shri Navaratnam and Kim Coghill)