March 2, 2016 / 5:33 AM / 2 years ago

S&P: Large Japan economic stimulus would raise concerns

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.

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

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.

Japanese government bond yields through the 10-year maturities have sunk to record lows below zero percent under the Bank of Japan’s negative interest rate policy, introduced in January, potentially lightening the government’s debt-servicing cost.

“In the short term, it can definitely reduce the government’s financing cost, but whether it does so in the long term depends on people’s continued confidence in monetary policy,” Tan said.

Although negative yields were unlikely to reverse any time soon, the phenomenon could damage confidence in monetary policy by hurting the financial sector and eventually result in an outflow of capital,” Tan said.

“At that point, the policy rates may still be negative, but I don’t think long-term yields will be negative.”

Reporting by Shinichi Saoshiro; Editing by Sam Holmes

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