Moody’s Investors Service suggested Tuesday that Japan’s “indecisiveness” on enhancing fiscal discipline following the Democratic Party of Japan’s loss of a majority in the Upper House will have a negative impact on its government bond ratings.
“Renewed leadership indecisiveness or instability would be credit negative,” Senior Vice President Tom Byrne said in a report titled “DPJ’s Election Loss Adds Uncertainty to Japan’s Fiscal Outlook.”
Byrne blamed the DPJ’s setback “in large part” to Prime Minister Naoto Kan raising the possibility of a hike in the consumption tax as a central election issue.
Consequently, legislative initiatives, including those related to a tax hike, can be blocked by opposition parties because the DPJ doesn’t have the two-thirds majority it needs in the Lower House to override Upper House votes.
Noting that the JGB market had reacted favorably to the government’s announcement June 22 of a plan to cut bond issuance by pushing its benchmark 10-year bond yield to a seven-year low of 1.14 percent, Byrne suggested the market now may move to put upward pressure on the yield.
“There is a limit to the amount of debt that the market will willingly finance at a very affordable cost to the government,” he said.
Meanwhile, Fitch Ratings sovereign analyst Andrew Colquhoun said the election result may make it harder for the government to draw up a more concrete fiscal consolidation plan.
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