TOKYO (Reuters) -Moody’s Ratings said on Tuesday the potential impact of a cut to Japan’s consumption taxes on the country’s sovereign debt rating will depend on the “scope, magnitude and permanence.”
Prime Minister Shigeru Ishiba’s ruling coalition lost its majority in upper house elections on Sunday, heightening the chance it may heed opposition calls for bigger spending and possibly cuts to Japan’s consumption tax rate of 10%, except for food items at 8%.
With the ruling coalition now required to seek the cooperation of opposition parties to pass legislation through parliament, prospects for fiscal expansion will heighten, said Christian de Guzman, senior vice president and manager at Moody’s Ratings.
But the ruling coalition’s position remains “sufficiently strong” to preempt significant changes to the consumption tax rates, he said in a statement on Tuesday.
“The potential credit impact of a lowering of consumption taxes will depend on their scope, magnitude and permanence,” he added.
Moody’s has rated Japan A1, the fifth-highest level, with a “stable” outlook since December 2014.
But it warned in a report in May that it may downgrade the rating “if prospects increase of a material and sustained widening in fiscal deficits leading to a significant deterioration” in Japan’s already high debt burden.
Japanese government bond (JGB) yields rose prior to the election on concerns a loss by fiscal hawk Ishiba’s ruling party could heighten the chance of big spending and cuts to Japan’s consumption tax.
Before the election, Ishiba shunned calls to slash the consumption tax, which funds social welfare costs for a rapidly ageing population.
He reiterated his caution over the idea after the election, telling reporters on Monday that cutting the tax could temporarily increase household income, but would raise questions on how to pay for Japan’s ballooning social welfare costs.
The Bank of Japan’s efforts to roll back its massive stimulus also increase the cost of funding Japan’s debt burden, which is the highest in the developed world at 250% of GDP.
A credit rating downgrade to Japan’s sovereign debt could trigger a sell-off of bonds, yen and Japanese stocks, and boost the cost of dollar funding for domestic banks, analysts say.
(Reporting by Leika Kihara; Editing by Jamie Freed)
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