Fitch Ratings affirmed its "A" rating for Japan but revised its long-term outlook to negative from stable, citing the coronavirus pandemic's impact on government debt levels and the country's growth prospects.
A sharp economic contraction will see Japan's economy shrink 5% in 2020 while a more than three-fold increase in the government deficit will boost public debt to just under 260% of GDP, a rise of 26 percentage points, a Fitch announcement said Tuesday.
Fitch projected a 3.2% bounce in growth for 2021, but said GDP will only return to its pre-pandemic level in the final quarter of that year.
Fitch said it expects Japan's government debt to stabilize at just above 260% of GDP between 2021 and 2022, before returning to a gradual downward path.
The negative outlook for Japan's "A" rating — which is both five levels above Fitch's junk rating and five levels below its top "AAA" rating — reflects concerns that "the higher debt ratio and downside risks to the macroeconomic outlook will … exacerbate the challenge of placing the debt ratio on a downward path over the medium term," Fitch's announcement said.
Meanwhile, a recent surge in coronavirus cases, after a nationwide state of emergency in mid-April seemingly succeeded in containing the health crisis, poses further risks for the country's economic outlook, the Fitch announcement said.
Fitch said expectations of a persistent rise in the government debt-to-GDP ratio over the medium term is the principal factor that could lead to a ratings downgrade for Japan, while a pickup in confidence that the government can get Japan's economy growing again and put its debt-to-GDP ratio on a downward path would be the dynamo for a ratings upgrade.