Japan could face "day of reckoning" if tax plans fail: Moody's

MANILA Wed May 2, 2012 2:06am EDT

Tom Byrne, senior vice president of Moody's Investors Service, gestures as he answers media queries during the Asian Development Bank meeting in Manila May 2, 2012. The lack of a sales tax increase in Japan could bring forward ''the day of reckoning'' in the Japanese government bond (JGB) market and cause investors to demand higher premiums, Byrne said on Wednesday. REUTERS/Cheryl Ravelo

Tom Byrne, senior vice president of Moody's Investors Service, gestures as he answers media queries during the Asian Development Bank meeting in Manila May 2, 2012. The lack of a sales tax increase in Japan could bring forward ''the day of reckoning'' in the Japanese government bond (JGB) market and cause investors to demand higher premiums, Byrne said on Wednesday.

Credit: Reuters/Cheryl Ravelo

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MANILA (Reuters) - Japan could face "the day of reckoning" sooner than expected if the government fails to raise the sales tax and investors demand higher returns on government bonds, Moody's Investors Service said on Wednesday, keeping up the pressure on Tokyo to enact tax reform bills.

Tom Byrne, senior vice president and regional officer, acknowledged the tax increase would leave Japan facing weaker economic growth but said the country needs to "bite the bullet" and start fixing public finances driven by swelling welfare costs.

"If you don't increase taxes you'd have to issue more JGBs which moves the day of reckoning closer to the tipping point where markets demand higher risk premiums," Byrne told reporters on the sidelines of the Asian Development Bank meeting in Manila.

"We tend to think there is a tipping point where things could change abruptly."

Facing snowballing debt, Prime Minister Yoshihiko Noda is struggling to preserve party unity and push through a contentious plan to double the 5 percent sales tax by 2015, with opposition parties that control the parliament's upper house refusing to cooperate.

Moody's rates Japan's sovereign credit at Aa3 with a stable outlook but has warned the rating would be reviewed if the tax hike plans are delayed further.

The government borrows more than it raises in taxes, and its debt pile amounts to two years' worth of Japan's economic output, the highest debt-to-GDP ratio in the world.

Unlike debt-stricken European nations, most of Japan's government bonds are owned by domestic investors, which has so far allowed the government to roll over the debt with ease despite concerns about its finances.

(Reporting by Rie Ishiguro; Editing by John O'Callaghan & Kim Coghill)

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Comments (2)
Jeepgirl wrote:
Moody’s should be glad that Japan has even survived all of the terrible catastrophies. They have less people and more problems than most nations, yet are one of the most stable in the world.

Shame on Moody’s for bullying a country that has been through such devestation, yet is making a slow, but sure comeback.

May 02, 2012 3:37am EDT  --  Report as abuse
WeWereWallSt wrote:
We think Moody’s got it right, but is late by about 15 years. Japan’s Old Boys, the fools who have led that wonderful country and its 125 million people to the edge of the cliff, have been doing their best to ruin that country since the early 1990s. It’s only thanks to an absolute brainwashing they give their kids in school that the younger generation hasn’t yet sent the Old Boys out to pasture. That day can’t arrive soon enough, tax increase or not.

May 02, 2012 5:07am EDT  --  Report as abuse
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