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Abenomics latest: Japan's sales tax decision draws mixed views from ratings agencies

Japanese Prime Minister Shinzo Abe's move on Wednesday to delay a 2 percentage point hike in the national sales tax was widely anticipated given the sluggish state of the economy. What that means for Japan's creditworthiness is more fuzzy.

Raising taxes is a crucial element of paring Japan's mountainous debt pile. As such, the delay raises concerns over the perilous state of government finances as well as the durability of "Abenomics"—a set of fiscal and monetary policies aimed to shake up the sclerotic economy.

That's not to say all rating agencies are ready to pull the trigger.

S&P Global Ratings, one of the 'Big Three' agencies alongside Fitch Ratings and Moody's, told CNBC on Thursday that it sees no implication on Japan's credit ratings as a result of the news.

"It doesn't spell the end of efforts by the government for fiscal consolidation. We believe when economic conditions are correct, they will hike the sales tax because their debt levels are already so high and there's not a lot of room for them to continue current levels of spending," explained Kim Eng Tan, senior director of sovereign ratings.

In the meantime, he believes fiscal performance is unlikely to weaken. Last year, S&P lowered Japan's rating to A+ from AA-, four levels below its highest rating of AAA.

"The game plan for now is to generate growth and bring back inflation. When conditions are right, as they were in 2013, then you can hike the tax. And even if growth does slow as a result, you will still generate an increase in tax revenue," Tan added.

An employee places a new price sign on bottles of coffee at an Aeon Co. supermarket in Chiba, Japan.
Tomohiro Ohsumi | Bloomberg | Getty Images
An employee places a new price sign on bottles of coffee at an Aeon Co. supermarket in Chiba, Japan.

The hike will now be postponed to October 2019 from April 2017, with Abe promising large-scale fiscal stimulus measures as part of the government's second supplementary budget.

Unlike S&P, Fitch offered a more cautious outlook.

A delay undermines the credibility of the political commitment to fiscal consolidation, Andrew Colquhoun, head of Asia-Pacific sovereigns, said in an e-mail, adding that Fitch will await further detail on the government's fiscal plans before drawing conclusions for Japan's ratings.

In April, the agency affirmed Japan's long-term rating at 'A,' noting that the nation's massive government debt was a key factor constraining the rating. It sees government debt at 245 percent of gross domestic product (GDP) by year-end, from around 230 percent in 2015, "by far the highest ratio of any rated sovereign."

Moody's told CNBC on Thursday it was in the midst of finalizing a statement.

Opinion was also mixed among economists.

"The previous announcement of a consumption tax delay in November 2014 had triggered a sovereign rating downgrade from Moody's, Fitch and S&P during the subsequent ten months. A further rating downgrade is possible, which will have negative implications for the yen and Japanese government bond (JGB) market," DBS economists pointed out in a Thursday report.

Some experts warned that the world's third-largest economy could re-enter a recession if Abe went ahead with the tax hike, echoing what happened in 2013 with the first tax hike, but others didn't believe a delay was beneficial either.

"There is a possibility that the postponement will deteriorate the near-term outlook for fiscal balance," research firm IHS said in a Thursday note.

Under his Abenomics platform, Abe intended to increase spending on childcare and nursing as planned in the 2017 budget, which was supposed to be funded by the tax increase, IHS explained, adding that "government financing issues are only likely to worsen in the medium-to-long term because Japan's population is already the oldest in the world and still rapidly ageing."

Given the nation's tepid consumption and nascent inflation levels, some critics have even argued Tokyo should be cutting the consumption tax instead to spur spending. But S&P Tan's said that option wasn't available to Tokyo.

"You can only afford to be adventurous in fiscal policy if your debt levels are decent...so Japan's room for maneuvering is very little."

If the government were to lower the tax, investors could interpret the move as irresponsible, which may prompt their exit from the JGB market and cause a spike in interest rates, he continued.

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