S&P Warns of Challenges Facing Japan

TOKYO (AP) -- Credit rating company Standard & Poor's warned Wednesday that the government of new Prime Minister Shinzo Abe may struggle to implement the fiscal reforms needed to sustain the vibrant economic recovery in Japan.

The temptation to raise government spending, a failure to tackle ballooning public debt, or a lack of will to push through unpopular but necessary policies could undermine the economy and possibly influence Japan's debt ratings, S&P said.

But it did not say it was considering lowering Japan's long-term sovereign debt rating of AA-, S&P's fourth-best rating, or its short-term credit rating of A1+, the top rating.

"To what extent the new government can stick to the principles of public sector reform will have a major bearing on the direction of the sovereign rating on Japan," the agency said in a release issued after Abe was elected premier by parliament Tuesday.

Combined with a possible slowdown in overseas markets, especially the United States, "the long expansion phase that Japan has enjoyed, soon to be the longest in postwar history, could be coming to an end," Standard & Poor's Ratings Services warned.

The appraisal doubted Abe's ability to push through unpopular policies ahead of a critical upper house election next July and questioned Cabinet picks, including Finance Minister Koji Omi, as political appointees rather than hardcore reformers.

More importantly, old-guard inertia from within Abe's ruling Liberal Democratic Party may put pressure on the new government to increase public spending, S&P said. That would only complicate efforts to cut the government's massive public debt.

"The temptation to implement economic stimuli in the form of increased spending on public projects may be too difficult for the new government to avoid," the statement said. "So far, there are no clear policy measures in place to maintain the pace of reduction in Japan's fiscal deficit in 2007."

For the five last years, Japan has mounted an economic comeback from more than a decade of doldrums under reforms ushered in by Abe's predecessor, Junichiro Koizumi.

But the new premier faces a host of challenges including taxation problems, a growing gap between rich and poor, government debt, a shrinking population, frayed relations with Asian trading partners and a lingering oversensitivity to U.S. downturns.

S&P's assessment underlines concerns by some economists that Abe's financial policies are too vague and take a back seat to his ambitions in foreign affairs and security policy. Abe has no experience in economic matters, and has largely sidestepped urgent issues such as the need for tax hikes to pay for mounting medical and retirement costs of an aging population.

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