Japan's economy is undergoing a positive shift! Moody's: Growth and inflation show "encouraging" signs, but resilience still faces a key test.

Rating agency Moody's believes there are encouraging signs that Japan's economy is on a path toward sustained growth and stable inflation, but a key test will be whether this resilience can withstand future shocks. Moody's currently assigns Japan an A1 rating, its fifth-highest investment-grade rating, with a "stable" outlook. Moody's has maintained this rating and outlook unchanged since downgrading Japan from Aa3 in 2014. Martin Petch, Vice President in Moody's Ratings' Sovereign Risk Group, said: "We are starting to see signs that Japan appears to be achieving more sustained growth, and inflation expectations are also fairly firmly anchored around 2%." "This has indeed changed," he said, referring to the shift in Japan's economy from decades of weak growth and prolonged low inflation. Petch declined to speculate on possible future rating actions, but said Moody's is watching whether the recent changes in Japan's economic and inflation environment can be sustained, while also monitoring whether Japan's reforms to boost productivity and address demographic issues can bear fruit. Petch added that a key test is whether Japan can continue to maintain economic growth and inflation stability in the event of future economic shocks. "Typically, when an economy has experienced a shock and successfully dealt with it, you can judge whether growth has become more sustained," he said. He noted that Japan has recently handled the energy price shock relatively well, while the Bank of Japan continues to advance policy normalization. In addition, Japanese Prime Minister Sanae Takaichi's plan this year to cut the food sales tax and her ambitious spending plans briefly unsettled the bond market, but Petch indicated that these measures currently pose limited direct threat to Japan's credit profile. He added that the impact of these measures on the fiscal position will depend on whether the government can honor its commitment to offset the resulting loss of fiscal revenue. Although government ministries initially requested a record 143 trillion (approximately US$908 billion) in spending, Petch said the increase is relatively limited compared with the combined size of the initial and supplementary budgets. He added that this further reinforces Moody's view that Japan's recent fiscal consolidation trend has not deviated materially. However, Petch said uncertainty remains over the government's 370 trillion public-private partnership investment plan. He added that these uncertainties include the extent of private-sector participation in the plan and whether the plan can deliver sufficient productivity gains to offset the adverse effects of Japan's demographic changes.