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By Tyler Durden

Following Abe’s decision to delay the April 2017 increase in the consumption tax, warnings about Japan’s rating (recall that Japan’s consolidated debt/GDP ratio is the highest in the world at 400%) were inevitable, and moments ago Fitch was the first to come out and while “affirming” Japan’s AA rating, it was the first major agency to cut its outlook from Stable to Negative. Expect the other two big agencies to do the same, followed inevitably by downgrades.

For now, however, the market does not care the tiniest bit about Japan’s ruinous fundamentals, and instead just wants to frontrun the BOJ inevitable easing, as a result yields across the Japanese curve have dropped to fresh record lows.

Here is the full note:

Fitch Ratings-Hong Kong-13 June 2016: Fitch Ratings has affirmed Japan’s Long-Term Foreign- and Local-Currency Issuer Default Ratings at ‘A’ and revised the Outlooks to Negative. The issue ratings on Japan’s senior unsecured local-currency bonds are also affirmed at ‘A’. The Country Ceiling is affirmed at ‘AA’ and the Short-Term Foreign-Currency IDR at ‘F1’.

KEY RATING DRIVERS

The revision of the Outlooks on Japan’s IDRs to Negative from Stable reflects the following key rating drivers:

• The Japanese government announced on 1 June that it had decided to delay a scheduled increase in the consumption tax from April 2017 until October 2019 (having already delayed the hike from the original date of October 2015), and did not identify any specific offsetting measures. The Outlook revision primarily reflects Fitch’s decreased confidence in the Japanese authorities’ commitment to fiscal consolidation.
• The consumption tax increase was an important element in the government’s fiscal consolidation strategy, which aims to bring the primary deficit of the general account of the central and local governments into balance by the fiscal year from April 2020 to March 2021 (FY20), against a 3.3% deficit in FY15. Fitch had expected the increase in the consumption tax rate to 10% from 8% to yield about 0.8% of GDP for deficit reduction (netting out some enhanced social spending it would have funded; it is unclear whether these increases will still occur). When announcing the delay, the government said it remains committed to its target of primary balance by FY20, although it did not set out any further specific measures to achieve this goal.
• Fitch no longer expects the consumption tax to rise in its base case. Fitch’s revised fiscal projections are for the ratio of gross general government debt to GDP to continue rising from 245% at end-2016 by 1-2pp per year over the projection period out to 2024, rather than peaking at 247% in 2020 as previously expected.
• The government indicated that its primary reason for delaying the tax increase was to shore up growth and boost the prospects of escaping deflation. With the delay in the tax increase, Fitch has revised its 2017 growth forecast up to 0.7% from 0.5% at the time of the April 2016 review. Fitch has also revised its 2016 forecast up to 0.8% from 0.7%. The 2016 revision balances a negative effect from …read more

  Source: Fitch Cuts Japan’s Credit Outlook To Negative

      

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  Posted June 13th, 2016 in Uncategorized.