S&P: Large Japan economic stimulus would raise concerns

Wed Mar 2, 2016 12:28am EST
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By Shinichi Saoshiro

TOKYO (Reuters) - Japan's government is unlikely to be able to launch a stimulus package to support its struggling economy without raising concerns about the size of its spending, ratings agency Standard & Poor's said on Wednesday.

Faced with a flagging economy, Japan is laying the groundwork for new government spending to pre-empt any weakness in household consumption, which would add to its already heavy debt burden.

S&P cut its rating on Japan from AA- to A+ in September, which is four notches below its top rating of AAA, because it doubts the government can reverse the country's economic deterioration. The agency also raised its outlook to stable from negative.

"The size of any stimulus will have to be carefully calibrated. At this point I don't think the government can put out a package big enough to support the economy without triggering concerns," Kim Eng Tan, S&P's Asia-Pacific senior director of sovereign ratings, said in an interview.

Tan said continued yen strength could remove the external support, such as the receipts inbound tourism bring in, which Japan's budget balance enjoys. If domestic demand and inflation are unable to make up for the loss of this external support, the fiscal balance could again deteriorate and pose a credit negative factor in the long run, he added.

"But even in this scenario, we are unlikely to change our rating in the next year or two," Tan said.

Japan plans to increase its sales tax in April 2017 and that would lift government revenue and lower its outstanding debt burden. Speculation has lingered among some market players, however, that Japan could postpone hiking taxes amid worsening demand.

"It really depends on the economic situation at that time. If you introduce a consumption tax hike when the economy is already weak or heading downwards, you are worsening the economic trend. You may not bring in that much revenue," Tan said.   Continued...

Pedestrians walk past a "no U-turn" traffic sign as they cross a street at a business district in Tokyo, Japan, February 19, 2016. REUTERS/Yuya Shino