Fitch expects Japan to keep deficits within manageable levels despite tax cut

By Makiko Yamazaki

TOKYO, Jan 21 (Reuters) - Fitch Ratings expects Japan's government to continue to keep deficits within manageable levels ​after a lower house election next month as Tokyo faces ‌pressure from the bond market over tax cuts, its sovereign analyst told Reuters on ‌Wednesday.

Japan's government bonds tumbled this week, sending the benchmark 10-year bond yield to a 27-year high on Tuesday, after Prime Minister Sanae Takaichi made an election pledge to suspend a food levy for two ⁠years.

Fitch affirmed its rating ‌for Japanese credit at A, five notches below the top AAA rating, with a stable outlook on Monday, ‍before the Japanese bond market rout intensified.

Jeremy Zook, director of Asia-Pacific sovereign ratings at Fitch, said its rating for Japanese credit factored in expectations that ​more expansionary fiscal policies were likely around the election.

"We will ‌continue to assess the impact of new fiscal announcements, including the latest proposal to suspend the consumption tax for food products, but we believe these announcements are sufficiently captured in our current fiscal forecasts," Zook said in an emailed statement.

"Fiscal expansion materially exceeding our current ⁠expectations remains a risk, but for ​now we assume the government to continue ​to keep deficits within manageable levels following the elections, particularly given recent bond market pressure," he added.

He also ‍noted that Japan's ⁠fiscal situation has improved over the past several years with higher nominal growth supporting a reduction in the fiscal deficit, giving ⁠headroom in its rating to accommodate uncertainties around fiscal policy.

Japan's public debt-to-GDP ratio ‌is the biggest among developed economies, exceeding 230%.

(Reporting by ‌Makiko Yamazaki; Editing by Kate Mayberry)