Japanese regional and local governments to see tax revenue rise, debt metrics improve in 2016

Moody's Japan KK says that its stable outlook for Japan's (A1, stable) regional and local governments (RLGs) is supported by recovering tax revenues, improving debt ratios and extremely low funding costs.

Specifically, Moody's says total revenues for the RLGs will grow 2.4% year-on-year in the fiscal year ending March 2017 (FY2016), on the back of rising tax receipts from corporates and recovering land prices.

Moody's conclusions are contained in its 2016 outlook presentation, "Regional and Local Governments-Japan: 2016 Outlook- Revenue Growth Supports Stable Outlook".

Corporate tax has been the fastest-growing revenue source for RLGs at average 11% between March 2012 and March 2015, and accounted for 30% of overall RLG revenues as of March 2015, up from 24% in March 2012.

The rise in corporate income -- and consequently corporate tax revenue for the RLGs -- has been driven by global and domestic economic growth. Coupled with the weakened yen, such growth has particularly boosted exports for corporates in the manufacturing sector.

At the same time, many RLGs have seen their operating margins improve, as controls on personnel costs and low debt servicing costs have offset rising welfare expenses for Japan's aging population. Moody's expects welfare expenses to grow by 0.5%-1.0% in 2016, down from an average annual 3% growth between 2010 and 2014.

The RLGs should also see their debt metrics improve, with the average ratio of net direct and indirect debt to operating revenues for the 12 rated RLGs to decline to 204% by end-March 2016 from 228% at end-March 2011.

Moreover, debt levels at the rated prefectures will stabilize, while bigger cities will see their debt levels decline.

Nevertheless, the RLGs' overall debt burden remains high, even after several years of surpluses.

Finally, funding costs remain low, helped by very low interest rates and strong investor appetite for 20-year and 30-year debt. The long-term structure of such RLG debt also effectively insulates them from any interest rate shocks.