Japanese credit rating cut as doubts mount over fiscal reform plans in wake of tax hike delay

Japanese Economic Update – 01 December 2014

Japanese credit rating cut as doubts mount over fiscal reform plans in wake of tax hike delay

Japanese equities continued to rally last week and at the open on Sunday night even in the face of a cut to the nation’s sovereign credit rating by Moody’s Investors Services. The gains for the index came as a by-product of the potential for a sell off in the JGB market as well as further yen weakness.

In its announcement the ratings agency cited elevated concerns over the country’s ability to cut its fiscal deficit and reduce debt in the wake of Shinzo Abe’s decision last week to delay the second phase of a sales tax increase.

This will have gradually contributed to easing the government’s burden of having to reduce the developed world’s largest sovereign debt pile. However, the Prime Minister’s decision to delay the hike has led to renewed scrutiny of Japanese finances, which now poses a further threat to the incumbent leader’s parliamentary majority at election time in December.

The ratings cut also further highlights the challenges facing the Japanese government as it seeks to balance the need for growth friendly stimulus as well as balance sheet positive debt and deficit reduction.

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Looking Ahead

While parliamentary elections and the fiscal deficit are likely to form the core of Japan centric conversations heading into the close of the year, the economy goes on unabated. This is as the days ahead see the leading indicators measure, final GDP figures for Q3, current account data and a raft of confidence surveys released to the market.

While the above surveys will doubtlessly have an impact upon investor’s sentiment toward the economic growth outlook, we see Japanese equities remaining supported by loose policy from the BOJ, a weaker yen and expectations of ongoing bids driven by GPIF buying. In short, we see little scope for an immediate correction in Japanese shares.

NIKKEI 225 // HOURLY INTERVALS

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