December 17, 2012 / 1:16 PM / in 5 years

TEXT-Fitch:Japan election removes policy implementation hurdle

(The following statement was released by the rating agency)

Dec 17 - The size of the Liberal Democratic Party’s victory in Japan’s election is likely to make policy implementation easier, Fitch Ratings says. The result gives the LDP and the New Komeito party the two-thirds supermajority needed to pass legislation that could otherwise be overruled by the upper house.

Japan’s public finances, and the closely-related question of the country’s economic performance, remain the key issues for the sovereign’s credit profile. While it should be easier for the new government, under LDP leader Shinzo Abe, to enact its policies, we need to wait for a fuller outline of its economic and fiscal plans before we consider the implications.

As we have often said, delaying fiscal consolidation would weigh on Japan’s ‘A+’ rating. We would view a delay or cancellation of the agreed doubling of consumption tax to 10% from 5% without a replacement measure as negative, but it is not clear that this will be government policy. Bloomberg News reported Mr Abe as saying Sunday that the timing of the increase would depend on economic data.

Even with the consumption tax hike, Japan faces a huge fiscal challenge compared with other major advanced economies. We forecast general government debt will reach 235% of GDP at the end of 2012. The outgoing government’s fiscal consolidation plan envisaged stabilisation of the debt/GDP ratio only in the fiscal year 2020. The Outlook on the rating is Negative.

The LDP also called for more monetary easing by the Bank of Japan during its election campaign. Again, it is not clear if and how this rhetoric will be translated into policy action. If a weaker currency led to persistently higher nominal yields on Japanese government bonds, it could weigh on the sovereign credit profile, which benefits from Japan’s low funding costs.

The LDP won 294 of the 480 seats in the lower house of parliament in Sunday’s poll. Reuters reported on Monday that Mr Abe was due to meet the leader of the LDP’s ally, the New Komeito party, to discuss economic policy. The LDP has indicated it will seek to build consensus with the opposition on key policy questions, including overhauling social security, rather than relying on its supermajority.

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