(Bloomberg) -- Japan could use a wake-up call over its mountain of debt through credit rating firms warning of the potential for cuts to sovereign bond ratings, according to a government advisor.
“Recent fiscal policy has turned into a popularity contest,” said Mana Nakazora, a credit analyst on an economic panel advising Prime Minister Shigeru Ishiba. “I’d rather that credit rating firms say that they’ll cut ratings” to warn authorities of risk, she said in an interview with Bloomberg Monday.
Nakazora’s comments come as Ishiba seeks parliamentary approval for a ¥13.9 trillion ($92 billion) additional budget to fund his stimulus package. The package was marginally larger than the one in the previous year, when economic conditions were worse, and would require ¥6.69 trillion in additional bond issuance.
“No matter who takes the helm, Japan’s fiscal discipline will worsen in a situation like this,” said Nakazora. She noted that the minority ruling coalition faces significant difficulty in curbing spending, given low support ratings for the cabinet and the public’s fondness for government handouts.
Nakazora, who is also the chief credit strategist at BNP Paribas Securities, said there’s likely some time before Japan’s credit ratings are actually downgraded. Still, she warned that once ratings begin to fall, they could tumble quickly.
Nakazora also criticized the government’s decision to resume subsidies for utilities as part of the stimulus package. The focus should be on helping those most affected by inflation, she said.
“The public should also understand the long-term financial implications of receiving cash now,” she said.
Given the additional budget, Nakazora believes Japan’s goal of achieving a primary balance surplus by the fiscal year 2025 is now nearly impossible. The government had previously projected that Japan would finally meet that target next year, signaling an improvement in fiscal health.
Rather than setting a new, stricter benchmark, Nakazora said Japan should continue to aim for a primary balance surplus, even if it requires extending the deadline.
Even as the country’s fiscal health worsens, Nakazora said the economy is essentially ready for an interest rate hike from the Bank of Japan in December.
“If the data are in line then the BOJ should calmly keep raising rates,” she said.
In an interview with the Nikkei newspaper last week, BOJ Governor Kazuo Ueda said interest rate hikes were “nearing,” as inflation and economic trends have aligned with the bank’s projections. In a Bloomberg survey in October, more than 80% of economists said they expected another hike by January, with just over half of respondents pointing to a December move. The bank is scheduled to deliver a policy decision on Dec. 19.
At the same time, Nakazora said there may be incentives for the BOJ to wait until January, amid the recent loosening of fiscal discipline. She suggested that the central bank should generally avoid raising rates when fiscal conditions are expected to worsen, given the potential impact on debt-servicing costs.
The government advisor also pointed to uncertainty surrounding US policies as another reason the BOJ may delay action. President-elect Donald Trump’s policies, such as high tariffs and corporate tax cuts, are seen as potentially causing significant market volatility. “I can’t rule out the possibility that the BOJ will hold off until January so it can see how the situation with Trump unfolds,” she said.
Either way, Nakazora stressed the need for Japan to wake up to the dangers of its debt challenges. She drew parallels to when black US naval ships arrived on the country’s shores in the middle of the 19th century, triggering a series of major changes in Japan.
“Honestly I’m hoping for black ships to arrive in the form of credit rating firms sounding the alarm,” she said.
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