Fitch: Japan’s inflation, interest rate hikes may boost credit rating

The rising prices and interest rates in Japan may strain public finances but could also help reduce debt and boost productivity, ultimately benefiting the country’s credit profile, Fitch Ratings’ Japan sovereign analyst suggested on Wednesday.

“Higher interest rates and inflation are more positive than people think,” said Krisjanis Krustins, director at Fitch, in an interview with Reuters.

Inflation can help by lowering the value of outstanding debt, pushing down the debt-to-gross domestic product (GDP) ratio.

Inflation can also encourage job seekers to switch jobs for better wages, while pressuring companies to become more efficient in the long run.

Fitch currently rates Japanese government debt at A, which is five notches below the top AAA rating, with a stable outlook. Krustins mentioned that if the debt-to-GDP ratio continues to decrease consistently, it could result in a higher rating.

He emphasised that the overall trend is more important than meeting a specific threshold.

However, Japan still faces challenges in improving its public finances, with the government needing to implement substantial measures to control spending and generate more revenue for sectors such as defence and childcare.

The government aims to achieve a primary budget surplus by the next fiscal year, a goal that some analysts consider ambitious.

The primary budget balance does not include new bond sales and debt-servicing costs, showing how much policy spending can be covered without taking on additional debt.

Fitch doesn’t expect Japan to meet its fiscal 2025 primary budget target, but Krustins downplayed concerns, stating they are “never too worried about the target” itself.

Last month, Moody’s Japan sovereign analyst echoed a similar sentiment, suggesting a missed target wouldn’t trigger negative ratings action as long as it reflects a continued “commitment” to fiscal reform.

Attribution: Reuters