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Announcement:

Moody's examines Japan's ability to drive economic growth and narrow fiscal deficits, given its high debt levels

 The document has been translated in other languages

Global Credit Research - 15 Dec 2017

Singapore, December 15, 2017 -- Moody's Investors Service ("Moody's") says that the key credit challenge for Japan (A1 stable) is sustaining its very high stock of government debt.

Specifically, the government's ability to improve potential growth and narrow fiscal deficits over the medium-term — which in turn would require further progress on structural reform and support the country's large domestic financing base — will determine Japan's sovereign credit profile beyond the current cyclical pickup in GDP growth.

Moody's analysis is contained in its just-released report titled "Government of Japan: FAQ on economic and fiscal developments against the backdrop of Japan's high debt".

The report provides Moody's view on the following five questions:

1) Can currently relatively robust GDP growth be sustained?

2) What is the outlook for Japan's fiscal strength?

3) How has Abenomics made a structural impact?

4) What are the credit implications of the recent elections for fiscal policy and fiscal metrics?

5) What are the credit implications of the increased geopolitical tensions on the Korean peninsula?

On the issue of whether Japan's robust GDP growth can be sustained, Moody's says that the country's recent pick-up in real GDP growth is largely cyclical. Consequently, Japan should demonstrate a moderation in growth towards its long-term potential over the medium term. And, while external demand will be supportive over the next two years, the economy is unlikely to accelerate much further as the impact of fiscal stimulus and improving labor market dynamics will wane.

On the outlook for Japan's fiscal strength, Moody's expects that the partial withdrawal of fiscal stimulus — including through the 2019 consumption tax hike — will support meaningful fiscal consolidation over the medium term. Favorable funding conditions on account of the home bias and continued monetary policy accommodation will continue to drive improvements in debt affordability, as measured by interest payments as a share of revenue.

Overall, Moody's projects that Japan's general government debt will stabilize at around 220% of GDP.

Moody's also says that reflationary policies under the Abenomics program have mainly contributed to an acceleration in real GDP growth. At the same time, potential growth has benefited from the accumulation of capital stock and higher labor participation rates; boosting employment in recent years and mitigating the impact of demographic decline. Abenomics has had little impact on inflation. Moody's projects that headline inflation will pick up towards, but will not be sustained above 2.0% in the foreseeable future

As for the credit implications of the recent elections in the country on fiscal policy and fiscal metrics, Moody's says that the LDP's strong electoral mandate reduces the probability of another delay in the consumption tax hike. The related increase in government receipts will further enhance debt affordability, but the earmarking of the additional revenue renders a reduction in the debt burden highly unlikely.

On the credit implications for Japan of the increased geopolitical tensions on the Korean peninsula, Moody's has identified Japan as one of the sovereigns most exposed to a deterioration in its credit profile — besides South Korea (Aa2 stable) — if a military conflict transpires.

Moody's says that the escalation of tensions between North Korea and the US (Aaa stable) has increased the probability of outright military conflict, although such a probability remains low. The impact of a potential conflict on Japan's growth and fiscal metrics could be significant.

Subscribers can access the report at:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1102416

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Christian de Guzman
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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