Fitch downgrades Japan's debt after sales tax hike nixed
The Fitch ratings agency has downgraded Japan's credit after the government failed to go through with a plan to increase sales taxes in its budget.
Fitch cut its rating on Japan to A from A+. That's five levels below the top rating, which is AAA.
Standard & Poor's gives Japan an AA- rating, better than the Fitch assessment. But it has a negative outlook, meaning a downgrade is possible. Moody's downgraded Japan to A1 status last year.
The problem is Japan's heavy debt load – at $11 trillion, the highest in the developed world and more than twice its average GDP.
Japan has been struggling to deal with the government debt in a way that doesn't hurt the economy.
At the same time, it has an aging population that needs government services.
It implemented the first stage of sales tax increase last spring, but that hurt businesses and consumer spending and drove Japan into recession.
That led Prime Minister Shinzo Abe to put off a second, planned sales tax hike, highlighting the difficulties Japan faces in getting its fiscal house in order.
Fitch said Monday that the government did not include sufficient measures in its budget to replace a sales tax hike.
It noted that Japan cut corporate taxes last year and has another corporate tax cut on its agenda.
"These developments increase Fitch's uncertainty over the degree of political commitment to fiscal consolidation," Fitch said in its commentary.
Japan has very high consumer savings, which have helped its own institutions buy much of its sovereign debt. And it is socially stable and relatively wealthy, which means it is not danger of slipping into junk bond territory.
However, the Fitch downgrade is a warning that Japan must address its debt-to-GDP ratio when it releases a new fiscal strategy this summer.
"The details of the strategy will be important, but the strength of the government's commitment to implement it will be even more important and will only become clearer over time," the ratings agency said.
