Fitch's latest analysis confirmed our concerns about Japan's fiscal situation raised in this post a few weeks ago.
Fitch Ratings: - Fitch Ratings has downgraded Japan's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'A+' from 'AA' and 'AA-' respectively. The Outlooks on both IDRs are Negative. The Country Ceiling is downgraded to 'AA+' from 'AAA'. The Short-Term Foreign Currency IDR is affirmed at 'F1+'.Japan is on an unsustainable path with more downgrades on the way. Given global investors' concerns about sovereign debt, it's only a matter of time before rates begin to rise, tipping the "unstable equilibrium".
Japan's gross general government debt is projected to hit 239% of GDP by end-2012, by far the highest for any Fitch-rated sovereign. This debt ratio would also have risen 61pp since the global financial crisis. This compares with a median of 39pp for OECD economies and 8pp for 'A' range sovereigns. Japan is less of an outlier when account is taken of its large pile of sovereign financial assets (worth about 80% of GDP on Fitch's calculations), but net indebtedness is still rising strongly.
Japan's Fiscal Management Strategy envisages declines in the government debt/GDP ratio only from FY21. Fitch regards this as a slow pace of consolidation given the scale of Japan's debt. Moreover, Japan's consolidation strategy is subject to political risk. The government's key revenue-raising plan is to hike the consumption tax to 10% by FY15 from 5% now. The measure is back-loaded (planned to start in FY14) and remains highly politically controversial.