Japan's economy sees positive shift! Moody's: Growth and inflation show "encouraging" signs, but resilience still faces key tests

According to Jinzhong Finance APP, rating agency Moody’s believes there are encouraging signs that Japan’s economy is experiencing sustained growth and moving toward stable inflation; however, a key test will be whether this resilience can withstand future shocks.

Moody’s currently gives Japan an A1 rating, its fifth-highest investment grade, with a “stable” outlook. Since downgrading Japan’s rating from Aa3 in 2014, Moody’s has maintained this rating and outlook unchanged.

Martin Page, Vice President of the Sovereign Risk Department at Moody’s, said: “We are beginning to see some signs that Japan appears to be achieving more sustained growth, with inflation expectations quite firmly anchored around 2%.” “This is indeed a change.” He was referring to Japan’s economy having shifted from decades of weak growth and persistently low inflation.

Page declined to speculate on possible future rating actions, but said Moody’s is watching to see whether recent changes in Japan’s economic and inflation environment are sustainable, and is also focused on whether reforms aimed at boosting productivity and addressing demographic issues are effective.

Page added that a key test is whether Japan can maintain economic growth and stable inflation in the face of potential future economic shocks. He stated: “Generally, after an economy has gone through a shock and responded successfully, you can judge whether growth has become more sustained.” He noted that Japan has recently coped well with energy price shocks and, at the same time, the Bank of Japan is steadily advancing policy normalization.

In addition, Japanese Prime Minister Sanae Takaichi’s plan to cut food sales tax this year, as well as her ambitious spending plans, once caused unease in the bond market. However, Page indicated that these measures currently pose a limited direct threat to Japan’s credit profile. He added that the fiscal impact of these measures will depend on the government’s ability to deliver on its promises and offset the resulting loss in fiscal revenue.

Although the initial spending requests by government departments reached a record 143 trillion yen (around 908 billion USD), Page said the increase is relatively limited compared to the combined initial and supplementary budgets. He added that this further strengthens Moody’s view that there has been no significant deviation in Japan’s recent fiscal consolidation trend.

However, Page noted that Japan’s 370 trillion yen public-private partnership investment plan still carries uncertainties. He added that such uncertainties include the degree of participation from the private sector, and whether the plan can deliver sufficient productivity gains to offset the adverse effects of Japan’s changing demographics.