Japan’s sovereign credit rating could fall one to three notches in the coming decade if the government does not implement a credible fiscal consolidation plan.
This risk, which the ASEAN+3 Macroeconomic Research Office highlighted in its recent annual consultation report on the country, underlines the challenges facing Japanese policymakers at a time of mounting global economic turmoil.
Even before the outbreak of the COVID-19 pandemic, Japan was struggling to maintain fiscal discipline in order to contain its government debt, which was and remains the highest in the world as a percentage of gross domestic product (GDP). But the government’s strong efforts, combined with sustained economic recovery following the global financial crisis, reduced the fiscal deficit from 8.7% of GDP in 2009 to 3.1% of GDP in 2019.