posted at 03:50
Author Name: Tomas Hirst
Moodys Downgrades Japan On Concerns About Abenomics
REUTERS/Petar KujundzicPrime Minister Shinzo Abe.Ratings agency Moody's downgraded Japan sovereign debt rating by one notch from Aa3 to A1 on concerns that Abenomics will fail to put government finances onto a sustainable path. In particular, the delay of the second sales tax hike following the collapse in domestic demand and inflation after its first increase has put the government's budget consolidation efforts under threat. As the ratings agency puts it, the indefinite delay "Resulted in the delay of the 2015 budget, and a concrete plan to meet fiscal targets is not likely to emerge until the second half of 2015". With government debt projected to be 245% by the end of 2014 such delays could knock investor confidence in the country. Growth has contracted sharply after the sales tax increase in April and policymakers are now under pressure to improve the country's performance. In particular, the government faces a huge challenge in shifting the expectations of domestic investors that it can break with over a decade of deflation - something that it has so far struggled to achieve. What this means is that the Japanese government is now stuck between a rock and a hard place. If Abe's reforms are seen as working to raise inflation, but without improving the government's finances, it could make paying for the state's huge debt burden much more difficult.

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