UPDATE 1-Fitch says Japan fiscal consolidation harder now

*Election result seen setback for debt reduction efforts

*Analyst says rating under pressure in medium term

(Adds comments, details)

HONG KONG, July 13 (BestGrowthStock) – Japan’s ruling party’s poor
showing at Sunday’s elections will make it more difficult for the
country to push through fiscal consolidation and a delay in a
credible plan beyond the year-end would increase the risk of a
rating downgrade, Fitch Ratings said on Tuesday.

Prime Minister Naoto Kan’s ruling coalition suffered a major
blow in Sunday’s upper house election, putting his policies to
deal with the country’s massive debt at risk. [ID:nTOE66B066]

“If we don’t see a credible plan come through by the end of
the year, it will send a negative signal for its rating, adding
pressure to the credit rating,” Andrew Colquhoun, Fitch’s
sovereign analyst for Japan, told Reuters.

Fitch has rated Japan’s foreign currency (Read more about trading foreign currency. debt AA and its
local currency debt at AA-minus, both with a stable outlook.

However, Colquhoun said he was not pessimistic about the
government’s ability to draw up such a plan and said the public
had not turned its back on fiscal consolidation as a policy
objective.

“The election will make it more difficult for the government
to draw up and implement such a plan, but I am not too
pessimistic as I do not read the election results as a rejection
of fiscal consolidation,” he said.

This was reflected in the better showing by the main
opposition Liberal Democratic Party (LDP), which has said that
Japan should raise the 5 percent consumption tax to 10 percent,
he said.

In Sunday’s upper house poll, Prime Minister Naoto Kan’s
ruling Democratic Party of Japan (DPJ) won 44 seats and its tiny
coalition partner none, losing their majority in parliament’s
upper house. That was fewer than the 51 seats won by the LDP.

Rival rating agency Standard & Poor’s has warned it might cut
Japan’s sovereign grade as the ruling party’s mauling in a
weekend election posed new hurdles for Kan’s plans to cut public
debt.

Colquhoun said Japan’s rating was under pressure in the
medium term from a declining domestic savings rate and this was
reflected in the recent pension fund selling of Japanese
government bonds (JGB).

Japanese public pensions turned net sellers of JGBs for the
first time in nine years in the fiscal year that ended in March,
the Nikkei business daily said on Tuesday.

Japan’s outstanding public debt is the largest among
industrial nations, approaching twice the size of its gross
domestic product, so any indication that there will be less
investment flows into JGBs could be a worry.

But Colquhoun said there was no financing pressure in the
near term as the domestic savings rate was still positive and
resources were being generated for JGB purchases.

“The banking system, pension funds and insurance companies
all have a strong appetite for JGBs, but there is a risk in the
medium term,” he said.
(Reporting by Umesh Desai; Editing by Jacqueline Wong and
Jonathan Hopfner)

UPDATE 1-Fitch says Japan fiscal consolidation harder now