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Investing.com -- Moody's Ratings has affirmed Japan's long-term local and foreign-currency issuer ratings and local-currency senior unsecured ratings at A1 with a stable outlook.
The rating action reflects Japan's progress on reflation and fiscal consolidation that have helped narrow the general government deficit. Moody's noted that normalization of monetary policy will continue at a pace that maintains strong debt affordability compared to peers, despite some weakening.
Japan's debt burden is expected to decline slowly but remain high at above 200% of GDP throughout this decade. Moody's expects domestic demand resilience to buffer negative impacts from deterioration in global trade caused by shifts in US trade policy.
The rating agency highlighted ongoing labor market tightness and persistent inflation as factors supporting Japan's sustained progress on reflation after three decades of deflationary conditions. Low unemployment and historically high inflation have driven strong wage growth and prompted private sector investments in labor-saving technologies like digitalization and automation.
According to Moody's calculations, Japan's fiscal position has improved compared to many advanced economies. The general government deficit has narrowed to around 2% of GDP since fiscal year 2023, down from 10.0% in fiscal 2020. This improvement is expected to reduce the general government debt burden to less than 210% of GDP in fiscal 2025 from almost 235% over the past five years.
The recent leadership transition in Japan is not expected to significantly reverse fiscal consolidation gains, despite the likelihood of new measures addressing cost of living concerns. Moody's forecasts the general government deficit will remain below 3% of GDP over the next two years.
The Bank of Japan's continued normalization of interest rates, which began in March 2024, is supported by growth and inflation momentum. This process has been gradual and orderly, with limited impact on government debt affordability due to the largely fixed-rate and long average maturity structure of outstanding debts.
Moody's expects general government interest payments to remain below 5% of general government revenue over the next two years, higher than the 3.8% low reached in fiscal 2023 but still stronger than many advanced economy peers.
The stable outlook balances ongoing reflation traction and fiscal consolidation against risks to debt affordability from monetary policy normalization and challenges from elevated geopolitical uncertainty and a more difficult global trade environment.
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