An increase in the consumption tax from 5% to 8% in April – the first increase since 1997 – plunged Japan into economic uncertainty and caused the economy to shrink by an annualised 7.1%.
“The government's response, to announce a delay in the second step in the consumption tax increase, appears to represent a shift in policy towards stemming re-emerging deflationary pressures on economic growth and away from near-term fiscal deficit reduction,” said Moody’s.
The east Asian country’s national debt stands at almost 200%, and is expected to continue to rise rapidly.
A consumption tax rate hike, which was initially scheduled to rise by a quarter to 10% in October 2015, was postponed last month due to economic uncertainty after a meeting of Japanese leaders and economists.
“The strategy also poses risks to fiscal consolidation and, over the longer-term, to debt affordability and sustainability,” said Moody’s. “Japan's deficits and debt remain very high, and fiscal consolidation will become increasingly difficult to achieve as time passes given rising government spending, particularly for social programs associated with a rapidly ageing population.”
The agency also said that Japan’s economic plan is creating too much uncertainty and is not adequately addressing deflationary pressures. Policy postponements and a lack of clarity between the short and long-term aims of Abenomics have contributed to the downgrade.
“The government has to, in effect, put one foot on the brake and another on the accelerator,” Thomas Byrne, senior VP of Moody’s sovereign risk group, told reporters in Tokyo after the announcement.
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