Fitch lowers credit outlook on Japan to negative on COVID-19 impact

Rating agency Fitch on Wednesday revised its outlook on Japan’s long-term foreign currency debt rating to negative from stable, citing the sharp coronavirus-induced domestic economic contraction.

“The coronavirus pandemic has caused a sharp economic contraction in Japan, despite the country’s early success in containing the virus,” Fitch said.

The global rating agency affirmed Japan’s rating at ‘A’.

Japan’s economy is expected to have contracted sharply in the second quarter as the coronavirus crisis hit global demand and a national state of emergency from mid-April to late May slowed consumer and business activity.

Although the government has lifted the emergency status, a recent jump in new infections could put renewed pressure on the economy.

Fitch projects the world third-largest economy to shrink by 5% in 2020 and to rebound to 3.2% growth in 2021.

Japan’s fiscal support and an expected recovery in external demand should help the economy to return to quarterly growth in the second half of 2020, Fitch said.

But it also expects bigger fiscal deficits in 2020 and 2021 would add significantly to public debt,

“The negative outlook reflects that the higher debt ratio and downside risks to the macroeconomic outlook will nevertheless exacerbate the challenge of placing the debt ratio on a downward path over the medium term,” Fitch said.

The rating agency also expects the Bank of Japan will keep its interest rates at current levels under its yield-curve control framework till at least the end of 2020.

“We believe the BOJ views interest rate cuts as part of its arsenal for potential further easing, but that it will refrain from doing so because of the impact that further rate cuts into negative territory would have on bank profitability,” Fitch said.