Japan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) outlook was downgraded from Stable to Negative by Fitch Ratings on Tuesday.
The rating agency projects Japan’s GDP will drop by 5% this year due to the economic impacts of COVID-19, with a slow recovery of 3.2% growth in 2021. Fitch’s forecasts expect Japan’s economy will only resume pre-pandemic levels in the last quarter of 2021 – two years after the initial pandemic outbreak.
The rating revision comes after the Bank of Japan’s monetary policy meeting last week, which expressed concerns about the risk of rising unemployment, which could further decrease consumer spending. “Japan’s economy has been in an extremely severe situation,” a summary stated. Although a moderate recovery was expected from the second half of 2020 onwards, there also remained huge uncertainties around external demand, which has caused a substantial fall in Japanese exports.
Japan is currently experiencing a second wave of COVID-19, with a record 1,264 new cases reported yesterday. Although the government is reluctant to reintroduce a state of emergency, which was lifted at the end of May, the growing outbreak could prompt the reintroduction of social distancing restrictions and further slow economic recovery. So far, Japan has tightened border restrictions and quarantine measures for incoming arrivals, which came into effect on Monday.
“Even in fiscal 2022, the economy is unlikely to return to the level reached before the outbreak of COVID-19, since it will take time for a structural change through which the economy can overcome the impact of COVID-19,” the Bank of Japan predicted.
Japan has battled growing government debt as it continues to provide considerable financial support to businesses and individuals. The nation’s gross general government debt ratio is expected to grow to 259% of GDP this year, according to Fitch, and remain at a high of just above 260% in 2021-22, before slowly decreasing.
The country is also experiencing deflation, which is expected to continue until the end of 2020, due to both COVID-19 and a drop in crude oil prices. Although this benefits consumers in the short-run, sustained deflation can damage the economy by contributing to unemployment and falling revenues.