Article Highlights

  • Moody's welcomes commitment to raise sales tax
  • Abe campaigning on education spending before election
  • New opposition party poses threat to LDP
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The benefits of raising Japan’s sales tax again outweigh the negatives, even if Prime Minister Shinzo Abe diverts some of the additional revenue to education and welfare, an official at ratings agency Moody’s Investors Service said on Tuesday.

The exact timing of when Japan achieves a primary budget surplus is not that important as long as the government is committed to fiscal reform in the medium term, Christian de Guzman, a vice president of sovereign ratings at Moody’s, told Reuters in an interview.

The comments could ease concerns about Japan’s fiscal discipline after Abe called for a snap election on Oct. 22 with promises to spend more on education,and welfare to appeal to voters.

Before parliament was dissolved, there was a bit of uncertainty that the tax hike would go through,” de Guzman said.

The benefits (of Abe’s plan) outweigh the negatives.

Moody’s rating on Japan is A1, which is four notches below its top rating. Its outlook for Japan is stable.

A central plank of Abe’s campaign is that he wants to go ahead with a sales tax hike to 10 percent from 8 percent in October 2019 and use some of the funds to subsidize education for pre-schoolers instead of paying down debt.

The tax hike would generate around 5 trillion yen ($44.22 billion) in revenue, but Abe plans to earmark only around 2 trillion yen for education and welfare, which is supportive of fiscal policy, de Guzman said.

Abe’s ruling Liberal Democratic Party also has omitted the deadline by which it aims to return to a primary budget surplus from its campaign platform. Originally, the government said it would achieve this goal in fiscal 2020.

The original timeframe was unrealistic, so there is little reason to be concerned that the LDP has abandoned it, he said.

De Guzman’s assessment is based on the assumption that the LDP and its coalition partner retain their majority in the lower house, but this scenario is less certain than it once was.

Abe’s approval ratings have been falling since he called the election. A new political party formed by Yuriko Koike, the popular mayor of Tokyo, is gaining momentum and could pose a serious challenge to the LDP.

Koike’s party wants to delay the sales tax hike, which could be negative for fiscal policy, but it is still uncertain if her party will be able to form a government.

De Guzman said uncertainty about fiscal policy and threats posed by North Korea could have negative implications for Japan, but on the positive side, export demand has been supportive of growth, so the risks to Japan’s sovereign rating remain balanced.

A sales tax increase in 2014 helped tip the economy back into recession.