By: Dr. Mike Campbell
Japan is not having the best time of it right now. It has recently been officially eclipsed by China as the world’s second largest economy, deflationary pressures persist and consumer outlook remains bearish. Now, for the second time in as many months, a major credit ratings agency has voiced concerns over the situation that the nation finds itself in.
Japan has the highest debt levels of any industrial nation; a problem which has been exacerbated by the country’s efforts to stimulate the economy in the aftermath of the global financial crisis. Moody’s has followed Standard and Poor’s in changing the outlook for Japan’s credit rating, in this case from stable to negative, giving the nation an Aa2 rating. Standard and Poor’s rates the nation’s credit outlook as AA-.
What Now?
Moody’s thinks that Japan must do more to cut borrowing and cautions that “economic and fiscal policies may not prove strong enough to achieve the government's deficit reduction target". Furthermore, they cautioned that the government’s policies may not be able to contain the increasing national debt levels. Another factor is that the Japanese population is aging which drives up health and pension costs. Since the demographic is that fewer children have been born in Japan over recent decades, this means that a public spending deficit in social security spending is likely to widen.
Japan has the lowest sales tax of any industrial nation at 5%; just a quarter of the comparable tax in the UK. Whilst increasing tax on consumption would net more money for the exchequer, the fear is that a strong rise could drive down domestic demand and hamper the weak Japanese recovery.