Japan fiscal adjustment plan too leisurely: Fitch

LONDON (Reuters) - Japan's fiscal reform plan is too leisurely and the government must strengthen it to improve its credit outlook, a senior Fitch Ratings official said on Friday after the agency cut its outlook for the country.

Andrew Colquhoun, head of Fitch's Asia-Pacific Sovereigns team, told Reuters Insider television that Japan's plan, detailed last June and due to be updated next month, aimed to stabilize its general government debt to gross domestic product ratio by 2020.

"If you look at some of the plans that some other high-grade sovereigns have come up with, that's pretty leisurely, particularly given the high starting level of the debt," he said.

Public debt is already twice the size of the $5 trillion economy, the heaviest burden among industrialized economies, and is set to swell further as the government deals with the cost of the disasters.

Colquhoun declined to specify more explicitly when Fitch felt the debt ratio needed to be stabilized. He said the agency would look at the credibility of Japan's fiscal plan, including factors such as how much fiscal improvement would be delayed by reconstruction after this year's earthquake, and contingencies if there were further shocks to the budget. Structural economic reforms to raise GDP growth are also important, he said.

One reason that Fitch has not already cut Japan's rating is that it wants to wait and see what the government comes up with next month in its fiscal plan, Colquhoun said.

Fitch moved its outlook for Japan's sovereign debt to negative from stable on Friday while affirming its AA minus local currency rating, its fourth highest rating and the same level as Standard & Poor's but one notch below Moody's Aa2.

In its statement on the outlook cut, Fitch warned that the cost of Japan's March earthquake and tsunami and the still-unknown bill for the clean-up after its nuclear disaster would further strain the country's already-shaky public finances.

FUNDING POSITION

Financial markets reacted little to Friday's outlook cut and Colquhoun said this underscored one of the strengths of Japan's sovereign credit profile: its access to a stable source of financing from a deep pool of private sector savings in the country, deployed with a very strong home bias.

"We see limited scope for a sudden change in the near term" to this funding picture, he said. "It would be inappropriate for the ratings to be that high if we thought the funding story was going to come unstuck any time soon.

"What we see is a medium-term risk that as the household sector, because of population aging, a secular trend, starts to draw down on their savings, ultimately the pool of savings will start to shrink."

Most projections suggest the financing and population aging problem will start to have a serious impact sometime in the middle of this decade or perhaps slightly later, making a credible medium-term fiscal plan important, Colquhoun said.

He said there was still scope for Japan's credit outlook to return to stable, noting that between 2003 and 2007 the economy and Japanese sovereign credit performed fairly well.

But he added, "It's fair to say the government would have to surprise us on the upside with their fiscal plans, both the medium-term plan coming up and the fiscal 2012 budget toward the end of the year, to get the ratings back to a stable outlook."

Since Japan's financial system is domestically oriented, any cut in its sovereign rating would not have much direct impact on the rest of the Asia-Pacific region and it is unlikely that any other sovereign ratings actions would result, Colquhoun said.

(Reporting by Nick Edwards; Writing by Andrew Torchia)