Downgrading Abenomics

On a day before starting election campaign, Japanese economy took a step down in international market. Moody’s downgraded the rate of Japanese national bond from Aa3 to A1 on Monday. Closely watching Prime Minister Shinzo Abe’s decision of postponing consumption tax hike from 8% to 10% after consecutive decline of gross domestic product for two quarters in the third quarter this year, the American rating firm revealed its pessimistic view on rebuilding fiscal discipline. Who does buy Abenomics?

Regional credit officer of Moody’s, Thomas Byrne, indicated that delay of consumption tax hike had caused the downgrading. “Timing and effect is uncertain under pressure of deflation,” told Byrne about Abe’s mid-term growth policy. There was a concern on Abe’s measures for structural problems such as low participation to jobs or decreasing population. In the ranking of Moody’s, A1, the fifth from the top among twenty-one rankings, is lower than China or South Korea and as same as Israel, Czech or Oman.

Newspapers reported the news as a wake up call on Abenomics. Asahi Shimbun interpreted the downgrading as pessimism in handling economy, in which Abe administration would need to simultaneously achieve revitalization and fiscal rebuilding. Even Yomiuri, firmly standing by Abe administration, raised a headline of “Warning to Abenomics.”

Downgrading of national bond was a typical target of criticisms against the decision of delay of introducing higher consumption tax rate. The delay would mean that long-term debt, already accumulated to the level of one quadrillion yen, would be further accumulated, making the achievement of fiscal balancing by 2020 harder. Although Abe promised that the tax rate would be raised in any bad condition in April 2017, the economic experts doubted seriousness of Abe’s mind.

Also quoting the warning about delay of taxation, however, Nikkei Newspaper was relatively calm in reporting. It emphasized perspectives of economists who expected limited response to the downgrading, because of great amount of purchasing national bond by Bank of Japan. They realized that there would be no steep hike of the interest of national bond, which might bring devastating damage on Japanese economy.

Damage on Abe is not about economic policy, but political credibility. His decision to postpone tax hike was buying time for Abenomics. But initial response from international market was something different from his expectation. The downgrading will negatively work against Abe’s election campaign.