TOKYO, May 23 (Reuters) - Prime Minister Yoshihiko Noda’s plan to double Japan’s sales tax rate would not be enough to stabilise the country’s public finance and its credit rating will remain under pressure even if he can pass the tax hike through the parliament, Fitch Ratings said on Wednesday.
One day after the rating firm cut its long-term local currency rating by one notch from AA minus to A plus, Fitch said the company is likely to keep negative outlook on Japan’s rating for about two years or possibly longer.
“If it (the tax hike) doesn’t happen, then it will be negative for the ratings. But even if it does happen, we still view that there are negative pressures on the ratings in the longer-term from the likely continued rise in sovereign indebtedness under the current fiscal consolidation plan as far as fiscal 2020,” said Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch Ratings.
Noda has staked his political career on plans to boost the country’s sales tax, currently 5 percent by 2015 to fund swelling social security costs in the country, which has the world’s fastest ageing population.
But opposition parties are unwilling to cooperate with Noda’s plan and the government lacks the numbers to force legislation through parliament.
“The consumption tax is, if the increase is passed in the form that is currently being debated, not necessarily something that we will see taking the rating back to stable outlook,” Colquhoun said in a teleconference.
“If it is passed, the negative outlook stays in place, we don’t expect that outlook necessarily to be resolved in six to 12 months, let’s say, but maybe more towards the end of our typical 24 months outlook period, or possibly even beyond that.”
After Fitch’s move on Tuesday, the yen briefly fell to around 80 yen per dollar but it quickly recovered thanks to the pervasive risk-averse mood in the market.
Credit downgrade usually does not have a lasting impact on markets in Japan because its government bonds are mostly held by domestic investors. Japanese Government Bonds have shown no reaction.
Following Tuesday’s rating action, Fitch has put its rating of major Japanese banks on negative watch.