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July 29, 2020 11:36 AM

Fitch downgrades ratings outlook for Japan to negative

Douglas Appell
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    Pedestrians wearing protective masks in the Shinjuku district of Tokyo.
    Bloomberg
    Pedestrians wearing protective masks in the Shinjuku district of Tokyo.

    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.

    See more of P&I's coverage of the coronavirus
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