September 27, 2013 / 6:49 AM / 6 years ago

Japan could face debt downgrade if budget deficit doesn't shrink: S&P

TOKYO (Reuters) - Japan could face a debt downgrade if it does not shrink its budget deficit, which is unlikely to return to primary balance by a targeted date of fiscal 2020, even if the prime minister’s policies go well, a senior official of Standard & Poor’s said.

Japan’s outstanding debt burden is the highest in the world at 1,000 trillion yen, or more than twice the size of its economy.

Standard & Poor’s remains doubtful about the scale of Japanese welfare reform and how much spending can be cut, Takahira Ogawa, director of sovereign ratings at the agency, told reporters on Friday.

Prime Minister Shinzo Abe is set to announce around October 1 that he will raise sales tax to 8 percent from 5 percent in April to pay for welfare spending, but the hike may not aid public finances because the government is compiling stimulus measures to offset the blow, Ogawa said.

“The government is taking about raising the sales tax by 3 percentage points, but the stimulus spending is worth around 2 percentage points,” Ogawa said.

“In the end a 1 percent point hike may not have much of an impact.”

The agency 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.

Japan’s government has finalized a $50-billion stimulus package that will pave the way for a scheduled increase in the sales tax.

The scheme will include some tax breaks to companies that invest in new plants or equipment, expand tax breaks for residential mortgages and some public works for reconstruction after the March 2011 earthquake and nuclear disaster.

Japan’s politicians want to stimulate the economy to make sure the sales tax hike doesn’t derail a recovery from a recession last year and delay an escape from deflation.

But stimulus spending is offsetting much of the benefit to government revenues from the sales tax hike, according to Ogawa.

The government’s efforts to reform welfare spending, the biggest drag on the state budget due to a rapidly ageing population, do not go far enough to ensure the big spending cuts needed to lower outstanding debt, Ogawa said.

Japan is unlikely to meet its target of eliminating the primary budget deficit, which excludes debt service and income from debt sales, by fiscal 2020, so Abe will have to find further ways to cut spending, Ogawa added.

The government is also debating whether to lower the corporate tax rate, but it is too hard to say how this will affect Japan’s sovereign rating because it is unclear if the measure will stimulate the corporate sector, Ogawa said.

Reporting by Stanley White; Editing by Edmund Klamann and Clarence Fernandez

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