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Is Japan at Risk of a Downgrade?

The COVID-19 pandemic and now Russia’s invasion of Ukraine have greatly increased the risks to the global economy. The task for Japanese policymakers is to navigate these challenges while pursuing fiscal consolidation in order to protect the country’s sovereign credit rating.

SINGAPORE – Japan’s sovereign credit rating could fall one to three notches in the coming decade if the government does not implement a credible fiscal consolidation plan. This risk, which the ASEAN+3 Macroeconomic Research Office highlighted in its recent annual consultation report on the country, underlines the challenges facing Japanese policymakers at a time of mounting global economic turmoil.

Even before the outbreak of the COVID-19 pandemic, Japan was struggling to maintain fiscal discipline in order to contain its government debt, which was and remains the highest in the world as a percentage of GDP. But the government’s strong efforts, combined with sustained economic recovery following the global financial crisis, reduced the fiscal deficit from 8.7% of GDP in 2009 to 3.1% of GDP in 2019.

As a result, Japan’s government debt plateaued at around 230% of GDP from 2015-19, after rising continuously for about a decade. In comparison, government debt in the United States and the eurozone in 2019 stood at about 107% of GDP and 84% of GDP, respectively.

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