Fitch Ratings downgraded Japan on Monday amid concerns about Japan’s failure to tackle its debt-to-GDP ratio, after the country failed to account for the financial impact of a deferred tax increase. The international credit ratings agency downgraded Japan to an 'A' from an 'A+'.
The latest rating is five steps below the highest possible ranking of AAA, but Fitch said the country’s outlook was stable, in a statement. The ratings firm said it expected Japan’s debt-to-GDP ratio to stabilize around 250 percent of GDP around 2020, which would make it the highest of any sovereign-debt issuing nation that Fitch rates.
"The government is set to unveil a new fiscal strategy in the summer of 2015," the statement said. "The details of the strategy will be important, but the strength of the government's commitment to implement it will be even more important and will only become clearer over time."
Another proposal by the Japanese government to lower the corporate tax raised concerns that the government would not be able to address its spiraling debt, Fitch added. “Japan’s main sovereign credit and rating weakness is the high and rising level of government debt,” it said.
In December, Japan was also downgraded by ratings agency Moody’s, which ranked it down to A1 from Aa3, citing uncertainty over the government's ability to achieve its debt reduction goals.
The sales tax hike was delayed by Prime Minister Shinzo Abe late last year. The change to 10 percent from 8 percent has been scheduled for later this year, but it adds additional pressure on Tokyo to address what is the worst debt-to-GDP ratio among industrialized nations.
The country has so far financed its debt payments from its domestic savings, but experts have warned that an ageing population will greatly increase the burden on Japan’s public finances, Reuters reported.
The yen fell briefly against the dollar after the announcement but then mostly recovered its losses. The Nikkei closed down 0.19 percent.