TOKYO: Rising prices and interest rates in Japan could benefit the country's creditworthiness by helping to pay off debt and boost productivity despite growing pressure on public finances, Japan bond analysts at Fitch Ratings told Reuters.
“Rising interest rates and inflation are more positive than people think,” Fitch director Krisgiannis Krastins told Reuters in an interview on Wednesday.
Higher inflation rates help reduce the value of outstanding debt, pushing down the debt-to-gross domestic product (GDP) ratio.
But it could also encourage workers to switch jobs in search of higher wages and encourage companies to think more deeply about long-term efficiency, he said.
“It frees up capital and talent for more productive activities,” Kraschins said. “To what extent that will materialize is unclear, but it's one of the side effects that could have a pretty significant positive impact on Japan.”
Fitch set Japan's credit rating at A, five notches below the top AAA rating, but with a stable outlook.
He said the debt-to-GDP ratio has improved in recent years and a continued decline in the ratio “could lead to an upgrade of the rating.”
“There are no specific criteria, it's more a matter of trends, but it's clearly not impossible,” he added.
But he noted that fixing Japan's bankrupt finances remains a challenge, as the government has yet to unveil any major fiscal restructuring or additional revenue measures for spending on defense, childcare and other areas.
The government has pledged to achieve a primary budget surplus by next fiscal year, but many analysts see this as an optimistic target.
The primary balance, which excludes new bond issuance and debt service costs, indicates how much of a policy action can be financed without issuing debt.
Japan's public debt is more than twice the size of its economy, by far the largest among developed countries.
Krastins said Fitch does not expect Japan to meet its primary budget balance target for fiscal 2025, but added that it has “not been overly concerned about the target.”
Moody's Japan government bond analysts told Reuters last month that missing the target would not lead to a downgrade of the rating because it remains a “commitment” to fiscal reform.