December 11, 2014 / 7:51 AM / 4 years ago

UPDATE 1-Fitch expects to downgrade Japan after next fiscal year's budget

* Fitch rates Japan A plus, four notches below best rating

* Fitch expects to downgrade Japan early next year

* Downgrade would follow similar action by Moody’s (Adds direct quotes, details on policy)

By Stanley White

TOKYO, Dec 11 (Reuters) - Fitch Ratings said it expects to downgrade Japan’s credit rating sometime early next year after the government delayed a sales tax hike, which would follow a similar downgrade by Moody’s as concerns grow about the country’s unprecedented debt pile.

Fitch wants to see what type of budget Japan compiles for next fiscal year but has conceded that there is little chance the government will cut spending enough to offset revenue lost from the tax hike delay.

Japanese Prime Minister Shinzo Abe’s party is expected to comfortably win a general election on Sunday, but the prospect of another downgrade next year could tarnish his economic credentials and pressure the government to slow spending growth.

“We don’t think the environment is conducive for submitting a budget that offsets the delay to the sales tax hike,” Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch, said in a conference call.

“Our expectation is the rating will come down.”

Fitch’s rating on Japan is A plus, which is four notches below the top AAA rating. Fitch is unlikely to consider a downgrade of more than one notch, Colquhoun said.

Abe’s decision to delay a sales tax hike to 10 percent from 8 percent may prove popular with voters and ease concerns about flagging growth, but it has all but eliminated any chance of meeting the government’s deficit reduction targets.

The tax hike, originally planned for October 2015, was delayed for 18 months after an earlier tax increase this April helped push the economy into a recession.

A government target of halving the primary budget deficit as a ratio of GDP next fiscal year looks unreachable, which means Japan’s second target of returning of eliminated the primary budget deficit in fiscal 2020 is not credible, Colquhoun said.

The primary budget deficit excludes debt servicing costs and income from bond sales.

Moody’s Investors Service also took the tax hike delay negatively, when it downgraded Japan last week to A1, which is the same level as Fitch’s rating.

Japan’s government is likely to compile next fiscal year’s budget in January.

Abe is planning to cut the corporate tax rate, which would make it even more difficult to close the budget deficit, Colquhoun said.

Japan’s public debt, at twice the size of its economy, is larger than Italy’s or any other troubled euro-zone nation.

The country’s ample domestic savings have financed most of the debt so far, which is a supportive factor for the sovereign rating, Colquhoun said.

The BOJ’s quantitative easing, which involves large government debt purchases in the secondary market, is a positive factor because it helps contain funding costs, Colquhoun said.

Standard & Poor’s has also cast doubt on Abe’s ability to repair Japan’s tattered finances. It has an AA- rating on Japan, which is three notches from the top rating of AAA. S&P’s rating on Japan has a negative outlook, meaning a downgrade is possible.

Editing by Chris Gallagher & Kim Coghill

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