Moody’s credit-rating firm has noted that Japan’s ability to meet its primary budget-balancing target next fiscal year is not a make-or-break situation in terms of their credit rating. Christian de Guzman, the Japan sovereign analyst at Moody’s, emphasized that the target should be seen as a commitment to fiscal reform rather than an absolute benchmark for rating action. While it is unlikely that the fiscal target will be met, Moody’s does not foresee an immediate negative rating action as a result.
With the prospect of rising interest rates on the horizon, there are concerns about Japan’s ability to manage its fiscal and monetary policy effectively. The Bank of Japan is expected to take a gradual approach to normalization, giving the government time to adjust its fiscal settings to prepare for potential rate hikes. However, Moody’s does not foresee a significant increase in interest rates within the next one to two years, allowing for some breathing room in terms of fiscal adjustments.
Japan’s public borrowing has reached more than twice the size of its economy, posing a significant challenge to the government’s fiscal stability. The primary budget surplus target set for the next fiscal year is seen as optimistic by many analysts, including de Guzman. While the government may struggle to achieve this target, Moody’s emphasizes the importance of continued commitment to spending and revenue reforms to avoid negative rating actions in the future.
Moody’s currently rates Japan’s credit at A1 with a stable outlook, reflecting the country’s relatively strong creditworthiness despite its fiscal challenges. While the government may face difficulties in meeting its fiscal targets in the short term, Moody’s acknowledges the commitment to reform and the significance of maintaining this commitment for long-term fiscal sustainability.
Japan’s fiscal reform challenges are significant, but Moody’s does not view the immediate failure to meet targets as grounds for negative rating actions. Continued commitment to reform and proactive adjustments to fiscal policies will be crucial for Japan to navigate its fiscal challenges and maintain its creditworthiness in the long run.