Fitch Downgrades Japan's Sovereign Rating

(RTTNews) - Fitch Ratings downgraded sovereign ratings of Japan citing the lack of structural measures to replace the deferred sales tax hike.

The credit rating was lowered to 'A' from 'A+' and the outlook on the rating was stable.

Moody's had downgraded Japan's rating in December after the government delayed the second sales tax hike.

Fitch had placed Japan's issuer default ratings on Rating Watch Negative on December 9, 2014. Fitch warned that ratings would be downgraded in the absence of broadly equivalent measures to replace the deferred sales tax increase in the FY15 budget.

The FY15 budget lowered corporate tax rates, although the base was broadened, making the impact of the measure broadly neutral. The government is set to announce a new fiscal strategy in the summer of 2015.

The strength of its commitment to implement those measures will be important and will only become clearer over time, Fitch said.

The agency expects Japan to achieve its interim fiscal target of a 3.3 percent of GDP primary budget deficit in FY15. If corporate profits fell back, pressure on the budget could rise in FY16, Fitch noted.

Fitch said the rating weakness was the high and rising level of government debt. The gross general government debt to GDP ratio was projected to rise to 244 percent of GDP by end-2015.

Japan's gross general government debt to GDP ratio was projected to stabilize around 250 percent of GDP in 2020 under Fitch's baseline fiscal projection.

Nonetheless, strong financing flexibility supports the ratings. Sovereign funding flexibility rests mainly on the massive stock of savings of the private sector and the strong "home bias" with which these savings are invested, it said. Moreover, high private-sector savings also support the external finances, which are a credit strength.

Macroeconomic performance was a rating weakness. Fitch trimmed its forecast for 2015 growth to 1.3 percent in March.