Fitch:

  • QE expansion signals Abenomics challenges
  • These considerations weigh on our ‘A+’ sovereign rating with a Negative Outlook
  • Fitch sees real GDP in Japan +1.3% in 2015 and +1.4% in 2014

More (via Reuters):

  • Surprise decision by the Bank of Japan (BoJ) to increase the scale of its asset purchases confirms the scale of the challenge confronting the Abe government as it seeks to deliver stronger real growth and inflation while also reducing the fiscal deficit
  • Weak consumption linked to the April sales tax rise was a factor in the BoJ’s decision to increase its quantitative easing programme, even though the Policy Board asserted that it expects this to be temporary
  • Latest data confirm that domestic demand and inflationary pressures remain weak, and have been declining since the 3pp sales tax hike
  • Core inflation (excluding food and energy) has remained flat since June
  • Retail sales growth has also been lacklustre through the second and third quarters
  • Fitch believes Abenomics’ prospects for a sustainable rise in nominal GDP growth – leading to a lasting exit from deflation – hinge on strengthening wage growth
  • The latest central bank action highlights Japan’s exceptional scope for policy flexibility owing to its independent central bank and the yen’s status as a major world reserve currency, despite the macroeconomic challenges
  • These are fundamental sovereign credit strengths, and recent data confirms the breadth for BoJ policy action
  • Notably, Japanese government bond (JGB) yields have not signalled any breakdown of investor confidence in monetary discipline or concerns that the policy action may lead to elevated inflation
  • The most powerful channel of the transmission mechanism may come through supporting asset prices and weakening the Japanese yen, thereby giving a direct kick to inflation and supporting exporters’ prospects
  • For Japan’s sovereign rating, Fitch maintains that the central issue remains whether the country can stabilise and eventually reduce its public indebtedness via some combination of stronger growth and a lower budget deficit. Japan’s general government debt is well above that of its peers, at close to 240% of GDP – almost double that of the next most indebted ‘A’ range sovereign, Ireland. A decision is expected shortly on a second sales tax increase, to bring the consumption tax up to 10% from 8% in October 2015. It is unclear as yet whether the government will go ahead with the tax rise, but the deliberations leading up to the decision will yield important information on government’s confidence in its ability to deliver its combined objectives of stronger growth and fiscal stabilisation.