Standard & Poor’s will be taking a keen look at the debt reduction target announced by the government in June, when the midterm fiscal policy will be compiled, but the result of this summer’s Upper House election may have a greater impact on its rating of Japanese government bonds, a director of the firm’s sovereign ratings section said.
“A middle-term target is very important, but depending on the election results, the administration itself could be changed,” Takahira Ogawa, a Singapore-based analyst who was visiting Tokyo, told The Japan Times recently.
“We would like to give more consideration to whether any plan or vision can be implemented,” he said.
The influential ratings firm in January revised its outlook on its AA sovereign rating on Japan from stable to negative, fueling global concern over the country’s snowballing debt and fiscal sustainability over the mid to long term.
The government has pledged to announce a midterm fiscal reconstruction target by the end of June, which market players are awaiting to gauge the government’s determination to both cut spending and increase tax revenues for fiscal reconstruction, a daunting political challenge.
During the interview, Ogawa said it is generally believed that the Democratic Party of Japan-led coalition, which includes the Social Democratic Party and Kokumin Shinto (People’s New Party), will remain in place after the Upper House poll.
But depending on the results of the election, Cabinet members could be changed and the SDP and Kokumin Shinto, the junior coalition members pushing for bigger welfare and public works budgets, may have more say in deciding policy and eventually force an increase in government spending, he said.
Public attention is also focused on whether and when the Cabinet of Prime Minister Yukio Hatoyama might announce a plan to raise the unpopular consumption tax, which is considered the key weapon for the government to increase revenues.
But Ogawa said S&P has already assumed the Hatoyama Cabinet, as the prime minister has repeatedly pledged, will not raise the tax for at least four years from the Cabinet’s inauguration last September.
“Even if the consumption tax is not mentioned in the midterm fiscal plan, that alone would not prompt us to lower the rating,” Ogawa said.
According to Ogawa, the sovereign credit of Japan “keeps deteriorating, but the pace (of decline) is very gradual.”
“On the other hand, the problems of Japan are very deep-rooted. A single remedy alone would not immediately prompt us to change our views on the rating” for JGBs, he said.
The nation’s households once boasted a high saving rate compared with other developed countries, allowing the government to keep easily financing its debt domestically.
But with the population aging rapidly, the savings rate has fallen to around 2 percent and could even go negative as the elderly start using their assets to support their lives in retirement, Ogawa pointed out.
Meanwhile, the shrinking population due to the low birthrate will make it more difficult to achieve economic growth, another negative factor, he said.
To reverse the population trends and stop long-term economic decline, measures to raise the birthrate, utilize more women in the workforce and change the strict immigration policy to introduce more foreign residents may be key policy options for Japan, Ogawa said.