Inflation needs Staying Power to help reduce Japan's Budget shortfall: S&P

SINGAPORE - Inflation's recent return could help reverse Japan's fiscal woes if it is sustained - and if Government revenue can maintain or increase its share of national income, Standard & Poor's said in a report published today.

Rising prices can likely strengthen Japan's public finances, for now, according to the report. “Much of the country's inflation, since April of this year at least, has come on the back of a hike in the sales tax. But the kind of sustained inflation that can raise Government revenue and stabilise the fiscal balance as social security spending grows remains elusive,” S&P says.

“In addition, apart from the sales tax increase, we see some temporary factors propelling much of the recent gains in consumer prices. Until the Bank of Japan achieves its so-called price stability target of 2%, it's too early to claim that inflation has provided long-term relief for the Government budget.

Japan's fiscal deficits have widened markedly since the global financial crisis. The general Government deficit was close to 2% of GDP in fiscal 2007 (ended March 31, 2008). It increased by approximately 1 percentage point the next fiscal year as the drag from the global crisis grew, and has been close to 8% of GDP since the fiscal year after that.

“In the next three years, we expect the fiscal balance to decline only marginally to 7.3% of GDP in fiscal 2017,” S&P says. www.standardandpoors.com (ATI).