Fitch affirmed Japan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at “A”, but downgraded the outlook to negative from stable. The rating agency said: “The coronavirus pandemic has caused a sharp economic contraction in Japan, despite the country’s early success in containing the virus… The Negative Outlook reflects that the higher debt ratio and downside risks to the macroeconomic outlook will nevertheless exacerbate the challenge of placing the debt ratio on a downward path over the medium term.”
Fitch also projects the economy to contract by -5% in 2020, before rebounding to 3.2% growth in 2021 “due partly to the low base effect”. GDP would not recover to pre-pandemic level until 4Q21. The gross general government debt ratio will rise by 26% in 2020 to around 259% of GDP and stabilize just above 260% in 2021-22. General government deficit would surge to 14.3% of GDP in 2020, up from 3.1% in 2019, then drop back to 10.9% in 2021 and 5.3% in 2022.
The rating agency also expects BoJ to maintain current interest-rate setting through “at least the end of 2022” under the YCC framework. It expects BoJ to “refrain from” cutting interest rate further because of the impact on “bank profitability”. Rather, “an extension of temporary quantitative easing programmes beyond their expiry in March 2021 or refinements to its forward guidance remain more likely.” Fitch also projects headline CPI of -0.6% at the end of 2020 and turns marginally positive in 2021.
