Fitch to Gauge Japan's Budget for Growth-Fiscal Discipline Balance
Fitch will scrutinise Japan's next budget for signs that PM Sanae Takaichi can pair growth spending with fiscal discipline, a senior analyst says.
Fitch Ratings will examine Japan's budget for the coming fiscal year to judge whether Prime Minister Sanae Takaichi can reconcile her growth-oriented spending plans with fiscal restraint, a senior analyst at the agency said.
Jeremy Zook, senior director of Asia-Pacific sovereign ratings at Fitch, said in an interview that the final budget proposal's composition would be key to assessing the balance between the "responsible" and "proactive" strands of the administration's fiscal policy.
Budget requests for the next fiscal year have reached a record, driven in part by a new framework that combines initial and supplementary spending, along with higher government borrowing costs stemming from Takaichi's expansionary fiscal stance.
Zook said Fitch would watch the primary balance closely, describing a firm assessment of that measure as the clearest signal of where fiscal policy is headed. The primary balance excludes debt-servicing costs and indicates whether government revenue can cover spending without adding to debt.
Fitch currently expects Japan's debt-to-GDP ratio to keep declining for the next five years, helped by stronger nominal growth and tax revenues despite the more expansionary policy stance, before levelling off. Much will hinge on whether Takaichi's investment programme succeeds in raising Japan's growth potential through public and private investment in strategic industries, Zook said.
He noted that governments worldwide are increasingly turning to fiscal policy to support investment and growth, though industrial policies have historically delivered mixed results. Letting the private sector lead in deciding where investment flows go would probably be most conducive to success, he said.
Fitch is still evaluating the programme and whether the government's 17 priority investment areas would benefit from sharper focus, Zook added.
In January, Fitch reaffirmed Japan's sovereign credit rating at A with a stable outlook, five notches below AAA. That places it one notch below S&P's A+ and Moody's A1 ratings for Japan. Zook said neither an upgrade nor a downgrade was more likely, describing the risks as balanced.