Fitch retains Japan credit rating with negative outlook

TOKYO: Credit ratings agency Fitch said on Monday it had kept Japan's sovereign rating at 'A' with a 'negative' outlook, as the COVID-19 pandemic posed downside risks to the country's economic and fiscal outlook.

"We expect the large fiscal support to be unwound gradually, but downside risks to growth exacerbate the challenge of placing the debt ratio on a downward path over the medium term," the ratings agency said.

Fitch said government debt jumped to 254.8% of gross domestic product last year from 231.2% in 2019, the industrial world's heaviest public debt burden.

The debt-to-GDP ratio will peak at 258.6% in 2023, before turning to a gradual downtrend, assuming continued low interest rates, the agency added.

The government's target of achieving a primary budget surplus by the fiscal year 2025 appears "well out of reach", as suggested by the Cabinet Office, which has projected primary deficits throughout this decade.

The high public debt ratio has not created financing strains so far, as low interest rates have prevented a rise in debt-servicing costs in a low-growth economy.

The world's third largest economy is expected to have shrunk 5.3% in 2020, followed by a rebound of 3.5% this year and 1.5% next, backed by exports, Fitch said.

Fitch said it assumed yields will stay low over the next few years given continued money printing by the Bank of Japan, despite the risk of high debt, leaving the economy vulnerable to future tightening of financial conditions.

The ratings agency said it expected the BOJ to maintain its current monetary policy settings over the coming year with its yield curve control, large-scale purchases of JGBs and riskier assets such as exchange-traded funds (ETFs) and J-REITs.

The BOJ has unveiled a plan to conduct an assessment of its monetary policy in March with the aim of enhancing effectiveness and sustainability of its policies, which Fitch said would likely result in only minor changes to the bank's operations.