While we no longer live in a world in which debt matters – because central banks will just monetize it in their ongoing and no longer covert effort to reflate the final bubble – and thus debt ratings are an irrelevant anachronism from a bygone era, we can’t help but recall a certain statement by S&P from September of last year, in which the rating agency reminded everyone just why Japan has to proceed with both its first sales tax hike from 5% to 8%, (which, together with weather, has now been blamed on Japan’s shocking quadruple-dip recession), but also the follow up from 8% to 10%, which as we now know, has been delayed indefinitely, and which was supposed to prefund welfare spending for Japan’s demographic disaster which with every passing day gets closer and closer.
This is what S&P said:
Japan could face a debt downgrade if it does not shrink its budget deficit, which is unlikely to return to primary balance by a targeted date of fiscal 2020, even if the prime minister’s policies go well, a senior official of Standard & Poor’s said. Japan’s outstanding debt burden is the highest in the world at 1,000 trillion yen, or more than twice the size of its economy.
Standard & Poor’s remains doubtful about the scale of Japanese welfare reform and how much spending can be cut, Takahira Ogawa, director of sovereign ratings at the agency, told reporters on Friday.
Prime Minister Shinzo Abe is set to announce around October 1 that he will raise sales tax to 8 percent from 5 percent in April to pay for welfare spending, but the hike may not aid public finances because the government is compiling stimulus measures to offset the blow, Ogawa said. “The government is taking about raising the sales tax by 3 percentage points, but the stimulus spending is worth around 2 percentage points,” Ogawa said. “In the end a 1 percent point hike may not have much of an impact.”
Now that the remainder of the sales tax hike is indefinitely postponed what is Japan doing instead, in addition to monetizing all of its debt issuance of course? It is about to inject another JPY3 trillion stimulus, which means that not only will Japan’s deficit will not shrink but it will in fact grow as a result of the incremental spending!
And then there is the hollow CTRL-C/CTRL-V echo chamber which because its has no idea what it is talking about (or has any recollection of facts from the distant 2013) is blaming the Japanese quadruple dip recession on, don’t laugh, austerity, when quite clearly what happened as part of Abenomics was this: “Japan’s government has finalized a $50-billion stimulus package that will pave the way for a scheduled increase in the sales tax. The scheme will include some tax breaks to companies that invest in new plants or equipment, expand tax breaks for residential mortgages and some public works for reconstruction after the March 2011 earthquake and nuclear disaster.”
Looks like the non-austerity spending did not quite offset impact of the tax hike.
And guess what: the sales tax hike was more than offset by increased spending:
Japan’s politicians want to stimulate the economy to make sure the sales tax hike doesn’t derail a recovery from a recession last year and delay an escape from deflation. But stimulus spending is offsetting much of the benefit to government revenues from the sales tax hike, according to Ogawa.
More complaints from S&P from over a year ago:
The government’s efforts to reform welfare spending, the biggest drag on the state budget due to a rapidly ageing population, do not go far enough to ensure the big spending cuts needed to lower outstanding debt, Ogawa said.
Japan is unlikely to meet its target of eliminating the primary budget deficit, which excludes debt service and income from debt sales, by fiscal 2020, so Abe will have to find further ways to cut spending, Ogawa added.
The agency has an AA- rating on Japan, which is three notches from the top rating of AAA. S&P’s rating on Japan has a negative outlook, meaning a downgrade is possible.
And now that Japan has clearly given up on pretending it cares about its budget ever again balancing, or its fiscal situation and is rushing headlong into the Keynesian abyss, we are holding out breath for S&P to follow through on its threat and to downgrade the land of the setting sun.
Ironically, Abe would be grateful: after all Japan hopes more “investors” dump bonds and buy stocks in one final liquidity supernova explosion. An S&P downgrade may be just the catalyst for this “virtuous” great rotation.
via Zero Hedge http://ift.tt/1urAd2z Tyler Durden