TOKYO (Reuters) – Moody’s (NYSE:MCO) credit-rating firm would unlikely take negative rating action on Japan even if the government fails to meet its primary budget-balancing target next fiscal year, saying that the target should be considered a commitment to fiscal reform, its Japan sovereign analyst said on Monday.
Christian de Guzman of Moody’s said he did not expect the fiscal 2025 budget target to be met, but the failure would not trigger a negative rating action.
“If they abandon that commitment and then we actually see that being followed through by actual deterioration and significant deterioration in the fiscal deficit that leads to much higher debt, I think we would have to examine the pillars of the rating,” he said.
The interview with de Guzman comes as he spoke exclusively to Reuters with the prospects of the world with rising interest rates and its potential impacts on Japan’s fiscal and monetary policy.
“We expect the Bank of Japan (BOJ) to take a very gradual approach to normalisation,” de Guzman told Reuters in an interview on Monday.
“That means they (the government) have some time to adjust their fiscal settings to prepare for a time when interest rates at some point could rise even higher,” de Guzman said. “We don’t see that happening in let’s say one to two years.”
Fiscal reform has become an urgent task since the central bank in March ended eight years of negative interest rates and other unconventional policy measures that had kept borrowing costs extraordinarily low.
Public borrowing now exceeds more than twice the size of the economy, by far the most among industrialised nations.
The government has pledged a primary budget surplus by the next fiscal year, a target many analysts regard as optimistic. The primary budget balance, which excludes new bond sales and debt-servicing costs, indicates to what extent policy measures can be financed without issuing debt.
“The government won’t be able to achieve the target,” de Guzman said. As long as the government sticks to spending and revenue reform commitments, failure to meet the target will not trigger any rating action, at least for the time being, he said.
“I don’t think those are forthcoming yet. Still, I think it’s signalling there’s a commitment, and I think it’s important to anchor that commitment.”
Moody’s rating for Japanese credit was last set at A1 with stable outlook in late 2014.
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