Fitch Ratings warned on Monday that it could downgrade Japan’s sovereign rating after Prime Minister Shinzo Abe delayed an increase in the nationwide sales tax by two-and-a-half years due to worries the economy has not shaken off deflation.
Japan’s anemic growth is also a credit weakness because Abe’s attempts to reflate the economy, known as “Abenomics,” have not raised potential growth, Fitch said in a statement.
The government could avoid a downgrade if it lays out new steps to meet its fiscal discipline targets, but a lack of measures to bolster confidence in its fiscal policy could lead to a downgrade, Fitch said.
“The government has decided to postpone the tax increase, which leaves us to revise our assessment of the government’s commitment to fiscal consolidation,” said Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch.
“If it looks like the debt ratio is going to go on rising, then the next move in the rating could be downwards.”
Fitch revised down its outlook for Japan’s A sovereign debt rating to negative from stable on Monday, a move that was not wholly unexpected given the market’s disappointment that critical fiscal reforms had been put on the back burner.
Japan’s A rating is five notches below the top AAA rating. In general, the time frame for the negative outlook is the next 18 months to two years, Colquhoun said.
Japan’s government was scheduled to raise the nationwide sales tax next year to 10 percent from 8 percent in April next year, but Abe said earlier this month he would push this back to October 2019.
It was the second time Abe delayed an increase after a rise from 5 percent in April 2014 tipped the economy into recession.
Fitch said in the statement the delay means the tax hike will not happen.
Japan’s debt-GDP ratio is the world’s worst, standing at more than twice the size of the $5-trillion economy.
The revenue lost from delaying the tax increase has raised concerns over how Japan will lower its debt burden and meet its target of returning to a primary budget surplus in fiscal 2020