Fitch Ratings Ltd yesterday lowered its outlook on Japan’s long-term foreign currency debt rating to “negative” from “stable,” citing effects from the COVID-19 pandemic and rising public debt as policymakers try to get the economy back on track.
“The coronavirus pandemic has caused a sharp economic contraction in Japan, despite the country’s early success in containing the virus,” Fitch said.
The global ratings agency affirmed Japan’s rating at “A.”
Japan’s economy is expected to have contracted sharply in the second quarter as the pandemic hit global demand, and a national state of emergency from the middle of April to late May slowed consumer and business activity.
The Japanese government has lifted the emergency status, but a recent jump in new infections could put renewed pressure on the economy.
Fitch said that the world’s third-largest economy is likely to shrink by 5 percent this year and to rebound to 3.2 percent growth next year.
Japan’s fiscal support and an expected recovery in external demand should help the economy to return to quarterly growth in the second half of this year, Fitch said.
However, it also expects bigger fiscal deficits this year and next year would add significantly to public debt.
“The negative outlook reflects that the higher debt ratio and downside risks to the macroeconomic outlook will nevertheless exacerbate the challenge of placing the debt ratio on a downward path over the medium term,” Fitch said.
The government has rolled out US$2.2 trillion of stimulus spending to respond to the pandemic, but analysts say that the huge public debt constrains its ability to ramp up fiscal spending to spur growth.
“The markets see the Bank of Japan [BOJ] will continue to buy government bonds if needed so that interest rates won’t spike, but Fitch’s move is an alarming sign for Japan’s fiscal spending,” Daiwa Securities Group Inc chief market economist Mari Iwashita said.
Fitch also expects that the Bank of Japan will keep its interest rate settings under its yield-curve control framework until at least the end of 2022.
“We believe the BOJ views interest rate cuts as part of its arsenal for potential further easing, but that it will refrain from doing so because of the impact that further rate cuts into negative territory would have on bank profitability,” Fitch said.
S&P Global Ratings last month lowered its outlook on Japan’s sovereign debt rating to “stable” from “positive.”
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