Fitch Ratings has revised Japan’s ratings outlook – to negative from stable – after saying its economic contraction was a result of the coronavirus pandemic.
“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 sovereign analysts Stephen Schwartz and Thomas Rookmaaker said in a note following the revision.
A negative rating outlook signals a negative trend on the rating scale but does not imply that a rating change is inevitable. Fitch announced the news while acknowledging Japan's early success in containing the virus.
Fitch projects the world’s third largest economy will contract by 5% for the full year in 2020, before rebounding to 3.2% growth in 2021, due partly to the low base effect. But it said the higher public debt ratio increases the sovereign's vulnerability to a tightening of financial conditions or other shocks.
Fitch projects Japan's gross general government debt ratio will rise by 26pp in 2020, to around 259% of GDP, and stabilise just above 260% in 2021-22, before turning to a gradual downward path.
Japan’s coronavirus infection count mostly plateaued through June but has shot up in July to over 32,000 from 18,000. Growth in the number of infections accelerated further over the past two weeks and is now above the April peak. Deaths have risen to above 1,000.
“A downturn in consumer spending and business investment has been exacerbated by a steep decline in exports associated with weak external demand,” the Fitch analysts said.
Japan’s 26% annual fall in exports in June was weaker than expected and analysts expect the goods and services sector plunged by 20% quarter-on-quarter in Q2, which means net exports may knock around 3.5%-points off Q2 GDP growth.
While the Japanese government is hesitant to re-impose sweeping restrictions on economic activity or declare a State of Emergency because of the major impact this would have on the economy, the resurgence of cases is forcing the government to modify its re-opening and stimulus plans.
“This resurgence of cases is likely to slow the consumption recovery as people leave home less and their sentiment worsens,” BofA Securiities economists Izumi Devalier and Takayasu Kudo said in a note.