(The following statement was released by the rating agency) HONG KONG/SINGAPORE, June 30 (Fitch) The policies included in the new economic "Growth Strategy" approved by the Japanese cabinet on 24 June, add detail but may still be insufficient to bridge the gap between the economy's lacklustre track record and government's ambitious growth targets. The vulnerability of Japan's debt sustainability to policy slippage or negative growth shocks remains. We continue to highlight high and rising government debt as the key credit and rating weakness. The macro outlook for Japan is constructive in the short term. The primary deficit target of -3.3% of GDP for FY15 is likely to be met, and we forecast real GDP growth to rise to an above-trend 1.6% in 2014. Latest data from the labour and real estate markets also suggest that the economic cycle is picking up, after taking into account the short-term negative impact of the consumption tax increase in April 2014. However, May's below-consensus print for industrial production (+0.5% month-on-month, against consensus expectation +0.8%) point to lingering risks to the near-term outlook. More substantially, it remains highly uncertain over the long-term as to whether Japan will be able to meet its economic growth targets. The government released "revitalisation case" projections in January 2014 for real growth averaging 1.7% per year over fiscal years 2014-2017 - against the 0.3% average over 2009-2013. The "revitalisation case" would see total factor productivity growth rise to 1.8% per year on average. The extent of the challenge is evident if comparison is made with the 1992-2011 averages for the OECD (1% per year) or Japan itself (0.7%). Core reforms are in the areas of corporate governance and taxation, investment mandates of public pensions, and raising the female labour force participation rate. There are also more specific sectoral policies and a thrust to create regional special economic zones. It is difficult to quantify the effects of these policies, in part because in most cases the timing and details of implementation have yet to be specified. However, even taken together, the measures do not yet seem transformative on the scale required to meet the government's ambitious targets. What is omitted is as relevant as what is there. The government has avoided making firm commitments under agenda items which could be potentially more contentious politically - including trade liberalisation under the Trans-Pacific Partnership (TPP), and substantive immigration reform. Admittedly, TPP implementation requires action from prospective partners, including the US. A goal to cut corporate income tax to below 30% is a core plank of the strategy to drive capital investment and real wage growth. However, with Japanese companies already sitting on a significant cash pile (equating to around 48% of GDP) and only lightly geared, this would suggest that there are broader structural issues beyond tax rates which are holding back corporate investment. Furthermore, only roughly 30% of Japanese companies pay any corporate tax at all, so cutting the tax rate without simultaneously broadening the tax base would potentially undermine efforts to stabilise public sector debt should growth fail to re-accelerate.
Contacts: Andrew Colquhoun Senior Director Sovereigns +852 2263 9938 Fitch (Hong Kong) Limited 2801 Tower Two, Lippo Centre 89 Queensway, Hong Kong Justin Patrie Senior Director +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Japan http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748650 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.