Moody's sees positive shift in Japan's growth, resilience remains key test

TOKYO (Oct 27): Moody's sees positive signs in Japan's return to sustained growth and stable inflation, but resilience will be key in future shocks, the agency's Japan sovereign analyst stated. Japan is rated A1 by Moody's, its fifth-highest investment-grade rating, with a stable outlook since its 2014 downgrade to Aa3, according to Martin Petch, a vice president at Moody's sovereign risk group.

Petch noted that the agency now observes "sustained growth and inflation expectations anchored around 2 percent" - a shift from decades of weak growth and low inflation. He declined to predict future rating actions but emphasized the need to monitor if recent changes in Japan's economic and inflation environment remain sustainable, along with reforms boosting productivity and addressing demographic issues.

A crucial test, Petch added, is whether Japan can maintain growth and inflation stability during future economic shocks. Japan has shown resilience in coping with recent energy-price shocks despite the central bank's efforts to normalize policy.

Prime Minister Sanae Takaichi's tax cuts and spending plans caused a stir in bond markets this year, but Petch believes they have not posed a significant immediate threat to Japan's credit profile. The fiscal impact would rely on the government delivering on its pledge to offset revenue loss.

Although ministries have requested a record 143 trillion yen in initial spending, Petch noted the increase was relatively modest compared to the combined initial and supplementary budgets, reinforcing Moody's view of Japan's ongoing consolidation trend. However, uncertainties surround the government's 370-trillion-yen public-private investment initiative, including private sector participation and productivity gains to offset demographic challenges.