Despite showing initial promise, the rating agency no longer believes that the government’s economic revival strategy, dubbed Abenomics, will be able to reverse the deterioration in growth in the next two to three years.
Average per-capita income fallen from $47,000 to $36,000 between 2011 and 2014, the rating agency pointed out, which reflected “weak average economic growth during the period and persistently weak price trends”.
“Our ratings on Japan balance the country’s strong external position, relatively prosperous and diversified economy, political stability, and stable financial system against a very weak fiscal position that the country’s aging population and persistent deflation exacerbate,” S&P said.
Working in the country’s favour, the rating agency explains are strong institutions and a free flow of information, helped along by a homogenous and cohesive society, which allow for unpopular but necessary policies to be pushed through.
It also boasts a currency with international reserve status and a current account surplus.
But, counterbalancing this, S&P says are weak fiscal attributes.
“Since fiscal 2008, the damage that the global financial crisis and the Great East Japan Earthquake have dealt to the Japanese economy has depressed government revenue. However, general government spending has continued to grow, partly as a result of expanding social security spending associated with the nation’s aging population.”
As a result, despite higher tax receipts, the agency expects annual increases in general government debt of around 5% of GDP or more over 2015-2018.
“By our projections, the corresponding increase in net general government debt will reach 135% of GDP in fiscal 2018 from 128% in fiscal 2015,” S&P said.
That said, S&P is careful to emphasise the stable outlook on its long term rating for the country.
It expects that “modest growth and stabilization of price levels will slow an increase in government indebtedness over the next two years and eventually stabilize it.”
