Krisjanis Krustins, Fitch Ratings' Japan sovereign analyst, said that higher inflation and rising interest rates in Japan could have a positive impact on the country's credit profile, reducing debt inflation and boosting productivity, despite increased pressure on public finances.
Krustins pointed out that higher inflation helps lower the cost of outstanding debt and reduce the debt-to-gross domestic product (GDP) ratio. "Rising inflation may also encourage job changes - as workers seek higher wages - and encourage companies to think more about long-term efficiency," the analyst added.
Fitch has set Japan's credit rating at A (five notches below the highest AAA rating), with a stable outlook. Krustins said that given the improvement in the debt-to-GDP ratio in recent years, a further decline in this indicator "may lead to an upgrade in the rating." Meanwhile, he warned that restoring Japan's faltering public finances remains a difficult task, as the government has yet to outline significant fiscal consolidation or additional revenue-raising measures to finance spending such as defense and childcare.
Krustins stated that Fitch doesn't expect Japan to meet its fiscal 2025 primary budget-balancing target but added it was "never too worried about the target."