Japan needs 3 percent nominal GDP growth: Moody's

A man rides a bicycle on a street in Tokyo August 24, 2011.

TOKYO (Reuters) - Japan must achieve nominal economic growth of 3 percent annually to bring its bulging debt under control as its aim of doubling the 5-percent sales tax by mid-decade would not be enough to achieve fiscal rebuilding, Moody's Investors Service said.

Tom Byrne, Moody's senior vice president and regional credit officer, also said the agency had no plans to change sovereign ratings for Japan in the next 12-18 months, adding that he saw no change in Japan's home-biased funding dynamics.

Earlier on Wednesday, Moody's cut its rating on Japan's government debt by one notch to Aa3, blaming large budget deficits and a buildup of debt since the 2009 global recession.

"Japan needs to achieve at least 3 percent nominal GDP growth annually to get its deficits under control and to contain the rise in the debt," he told Reuters in an interview.

"The key thing would be to increase productivity ... Various supply side measures will have to be taken, but if Japan were to boost its productivity growth then the 3 percent nominal GDP growth would be in reach."

Byrne also said the government's aim of doubling the 5-percent consumption tax rate by mid-decade would not be enough to achieve a balanced budget.

"That's not enough. The government knows that as well. What that does at least ... enables the primary deficit to be cut in half to about approximately 3 percent of GDP ... It doesn't achieve anything more than that at the 10 percent level."

Tokyo aims to achieve 3 percent nominal GDP growth and 2 percent real growth by 2020, but the target is seen as a tall order given that Japan's growth over the decade up to the last global financial crisis was way below those levels.

Japan's economy fell back into recession after the March 11 earthquake and tsunami that devastated the country's northeast coastal areas and triggered the world's nuclear crisis since Chernobyl in 1986. The huge cost of reconstruction is seen straining public finances further.

Byrne noted that Japan's export-reliant economy is facing headwinds from the yen's strength and described the current situation as stressful, though not dire.

On keeping Japan's ratings stable, he said: "We think despite continued large deficits perhaps this year and next year that the funding dynamics will remain unimpaired, Japan will be able to finance these deficits. However, Japan won't be able to finance these large deficits at such a low cost in the long run, that's the way we look at things."

He added: "At any rate, we don't think that putting Japan's rating at (single) A level is justified and appropriate at this time given the credit strength of Japan."

After Wednesday's downgrade to Aa3, Moody's said the outlook was now stable given the "undiminished home bias of Japanese investors and their preference for government bonds, which allows the government's fiscal deficits to be funded at the lowest nominal rates globally."

(Reporting by Chikafumi Hodo and Tetsushi Kajimoto; Editing by Edwina Gibbs and Chris Gallagher)