TOKYO (AFP) – Moody’s downgraded Japan’s credit rating on Monday, citing “rising uncertainty” over the country’s debt situation and Prime Minister Shinzo Abe’s faltering efforts to kickstart the world’s number three economy. The ratings agency said it cut Japan’s rating by one notch to A1 from Aa3, after the economy sank into recession during the third quarter.
In the wake of the poor GDP reading, Abe announced that a planned sales tax hike set for next year would be delayed, as he called a snap election that the premier described as a referendum on his “Abenomics” growth blitz.
Tokyo raised the sales levy in April – to 8 per cent from 5 per cent – for the first time in 17 years, in a bid to generate more revenue to pay down an eye-watering national debt.
Japan has one of the heaviest debt burdens among rich nations, at more than twice the size of the economy. But the increase slammed the brakes on growth just as the economy, plagued by years of deflation, appeared to be turning a corner.
“The first driver for the downgrade of the Japan government’s debt rating to A1 is the rising uncertainty over whether the government’s medium-term deficit reduction goal is achievable, and whether policy makers can overcome the tensions inherent in promoting growth while simultaneously stabilising and reversing the rising debt trajectory,” Moody’s said in a statement.
Holding off the fresh tax hike, initially planned for late 2015, “poses risks to fiscal consolidation and, over the longer-term, to debt affordability and sustainability”.
“Japan’s deficits and debt remain very high, and fiscal consolidation will become increasingly difficult to achieve as time passes given rising government spending, particularly for social programs associated with a rapidly ageing population,” the ratings agency added. Preliminary GDP data last month showed Japan’s economy shrank 0.4 per cent, or at an annualised rate of 1.6 per cent, in the July-September quarter, following a 1.9 per cent contraction in the April-June quarter – or 7.3 per cent at an annualised rate.