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Fiscal target delay would pressure Japan debt rating - Moody's

By Leika Kihara WASHINGTON (Reuters) - Japan's sovereign debt rating will come under downward pressure if its government falls behind on its goal of achieving a primary budget surplus in fiscal 2020, Tom Byrne, senior vice president of Moody's Investors Service, said on Saturday. The budget target has become increasingly difficult to achieve with Prime Minister Shinzo Abe having delayed a second sales tax hike last year, after the first increase nudged Japan into recession. Abe's decision prompted Moody's to cut Japan's sovereign debt rating by one notch to A1 in December. The U.S. ratings agency has said the outlook was stable. "If the government were to fall behind (in achieving the target), in general terms it would put downward pressure on ratings," Byrne, who oversees sovereign debt ratings of Japan and other Asian nations, told Reuters on the sidelines of the spring meetings of the International Monetary Fund and World Bank. "On the other hand, if the government is ahead of the curve, that would put upward pressure on the rating." Japan's government is due to come up with a new, medium-term fiscal reform plan around June to reassure markets it is committed to fixing its tattered finances, although markets doubt it will include details on how to reduce the country's huge debt. Byrne said he will scrutinize the plan to see whether the government will shift its approach of focussing on tax increases in restoring fiscal health, which has not worked well because of the adverse effects on economic growth. Countries that succeeded in fiscal consolidation have historically focussed on spending cuts rather than tax hikes, he said. "One of the difficulties I see in (Japan's) fiscal policy is that the government has predominantly relied on the tax side of the equation rather than expenditure cutting," Byrne said. "We're curious to see to what extent that expenditure restraint will play a greater role" in the medium-term fiscal reform plan, he said. Byrne, however, added that cutting social welfare spending, which makes up one-third of total government expenditures due to a rapidly ageing population, will be "politically very difficult." NO ROOM FOR COMPLACENCY The first two arrows of the prime minister's "Abenomics" policies - bold monetary easing and fiscal spending - gave the economy a short-term boost by lifting business sentiment. But Abe has been slow in delivering the third-arrow structural reforms seen as essential to boost growth potential. Fiscal policy must remain tight given Japan's huge public debt, which adds to the importance of delivering third-arrow reforms to revive the economy on a sustained basis, Byrne said. "The third arrow is still missing in the bundle of three arrows," he said. "In the long run, it's the growth revitalization arrow that's the most important one because the other two will break without that third arrow." Byrne warned of complacency even as the Bank of Japan's aggressive monetary easing - dubbed "quantitative and qualitative easing" (QQE) - keeps borrowing costs very low, saying that there is no guarantee they will stay low forever. "Probably, the QQE is intended to be a temporary policy. At some point ... there could be unintended consequences," such as a sharp rise in bond yields, he said. (Reporting by Leika Kihara; Editing by Paul Simao)