Fiscal discipline to gain market confidence

TOKYO: Japanese Prime Minister Naoto Kan on Friday said the country must demonstrate fiscal discipline to gain market confidence, a day after the country's credit rating was downgraded by Standard & Poor's.
"What is important is that we maintain fiscal discipline to maintain the market's confidence in our nation's fiscal policy," he told parliament.
S&P on Thursday cut Japan's credit rating for the first time since 2002, accusing the government of lacking a "coherent strategy" to ease the highest debt of any industrialised nation.
Japan's debt is around 200 percent of GDP after years of pump-priming measures by governments trying in vain to arrest the economy's long decline.
The US credit risk appraiser cut its rating on Japan's long-term sovereign debt to "AA minus" from "AA", putting it on par with China and saying that it expected the country's groaning fiscal deficits to stay high in coming years.
Analysts said Thursday's downgrade reflected a lack of confidence in a government whose ability to pass key legislation is hamstrung by not having a majority in parliament's upper house.
Kan's government is working towards drafting a basic proposal by the end of June on overhauling the nation's tax and social security systems, but S&P said there was a "low chance" this would lead to improvement.
"The downgrade reflects our appraisal that Japan's government debt ratios already among the highest for rated sovereigns will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s," S&P said.
"The Democratic Party of Japan (DPJ)-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics," it said.
The new rating is the fourth highest in terms of quality on a scale of 22.
S&P cited Japan's high budget deficit, persistent deflation and an ageing society as factors pressuring the centre-left government's finances, but added its outlook was stable given its "strong" external balance sheet.
The government has been able to fund its growing fiscal gap by raising money in the domestic market, with around 95 percent of the country's huge debt held domestically via banks and pension schemes.
Japan's ability to finance its debt is therefore seen as sustainable for now, but analysts warn pressures will increase as the population ages and dips into savings to spend in retirement.