Moody's: Japan's focus on fiscal restraint supports the sovereign's credit profile

Moody's Investors Service says that Japan's (A1 stable) updated fiscal and growth strategies, passed by the cabinet on 30 June, focus on spending restraint and supply-side measures, and support the sovereign's credit profile. But Japan's debt burden continues to pose risks, to which the authorities are formulating more creative policy responses.

The government said it would aim to restrict its general expenditure to JPY1.6 trillion through the fiscal year starting April 2018, matching spending over the previous three-year period. But this benchmark is subject to economic and price trends, indicating leeway to increase spending further should output growth weaken, says Moody's.

The administration's plan to eliminate its primary deficit also continues to rely on projections of 2% growth in real terms, and of 3% in nominal terms through 2020. Moody's, however, believes that robust economic expansion is unlikely to endure without growth-enhancing structural reforms.

Moody's conclusions were contained in its just-released report on the Government of Japan, entitled "Fiscal Restraint in Growth Plan Update Supports Sovereign Credit Profile."

Boosting productivity is the latest focus of the third arrow of Prime Minister Shinzo Abe's revitalization strategy, which designates the next three years as an "intensive reform period" to create the foundations for solid growth.

The strategy's wide-ranging pledges include increasing the use of information technology (IT) by small and medium-sized enterprises, expanding support for vocational training, reforming universities, and paving the way for more foreigners to work in areas including IT and tourism.

Moody's says such steps could eventually enhance productivity, but it will take time for the reforms to start supporting growth.

At the same time, Moody's notes that the possible conclusion of the Trans-Pacific Partnership (TPP) free trade agreement later this year could bolster Abenomics' supply-side, productivity-enhancing agenda.