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Moody's Investors Service considers recent data releases from Japan to be credit positive because a stronger economy would increase tax revenues and facilitate steps toward fiscal consolidation, including a planned hike in the consumption tax in April 2017.
On 8 June, Japan's (A1 stable) government announced that the economy had expanded at a much faster pace than it previously reported in the January-March quarter, following figures indicating a modest pickup in wage growth.
While the latest GDP figures highlight consumption as a continued weakness, wages appear to be slowly rising.
Moody's conclusions were contained in an issuer comment on Japan, "Acceleration in GDP, Wage Growth Is Credit Positive for the Sovereign."
The latest data show that Japan's economy grew an annualized 3.9% in real terms in the first quarter of 2015, quicker than preliminary estimates of a 2.4% increase. The 3.9% is also significantly stronger than a 1.2% expansion in October-December 2014, which followed two consecutive quarters of contraction.
Moody's notes that a rise in inventories and a pickup in private non-residential investment provided significant contributions to the latest acceleration, an indication of growing corporate confidence. Exports supported the rise in output.
Recent government and trade-union data also suggest that wage growth may finally be starting to gather momentum, highlighting the potential for a gradual increase in consumer demand. But the government will likely want to see more conclusive evidence if it is to go ahead with a second delayed hike in the consumption tax to 10%, and any subsequent increases.
Moody's notes that an update to Japan's medium-term fiscal and growth plan later this month may provide insight on the feasibility of the government's goal of achieving a primary budget surplus by 2020.
The route to that benchmark is based on projections that the economy will grow 3% in nominal terms or 2% in real terms over the medium to long term.
In this context, Moody's believes that sustained robust expansion is unlikely without a strong package of growth-enhancing structural reforms over the medium term. In the meantime, we forecast that real GDP growth will pick up to 1.5% in fiscal 2016, from 0.5% in fiscal 2015.
