Japan may not be able to avoid a downgrade of its sovereign debt rating even if it presents a strong welfare and tax reform plan next month, because of doubts that its economy can grow quickly enough to generate higher tax revenue over the long term, Moody's Investors Service said.
A lack of consensus between Japan's government and main opposition political party on fiscal policy after a devastating earthquake and tsunami on March 11 also suggests that a downgrade is likely after Moody's completes a review within the next three months, said Tom Byrne, the ratings agency's senior vice president and regional credit officer.
The Japanese government will release plans to overhaul social welfare spending and taxes next month, and the grim assessment from Moody's is a further blow to the ruling Democratic Party, which is already facing a motion of no confidence from the opposition and a revolt within its own ranks.
"We're suggesting that a more likely outcome is a downgrade, even with a seemingly strong fiscal program," Byrne told reporters.
"The strength of Japan's economic recovery in the long term has more uncertainty and is weaker than we expected. In the long run, a key to fiscal consolidation is to have economic growth strong enough to generate tax revenue."
Moody's on Tuesday placed Japan's Aa2 local and foreign currency sovereign ratings on review for a possible downgrade, citing concerns that government plans to reduce its debt would not be strong enough given the fiscal burden from the March 11 disaster.
Moody's is looking at the net effect of policies for revenue and spending when it evaluates Japan's public finances, Byrne said. Increasing the sales tax to pay for welfare spending is probably inevitable but may not necessarily be a positive as it could hurt consumer spending, he added.
Japan has been mired in economic stagnation for much of the past two decades and its repeated efforts to jolt the economy back to life with stimulus spending propelled public debt to twice the size of its $5 trillion economy.
Japan is facing its worst crisis since World War Two after a 9.0 magnitude earthquake and a tsunami battered its northeast coast and triggered a nuclear crisis. The government estimates the material damage alone could top $300 billion, making it by far the world's costliest natural disaster.
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