By Tetsushi Kajimoto

TOKYO (Reuters) -Moody’s doesn’t expect Japan to meet its fiscal 2025 primary budget-balancing target but that won’t trigger negative ratings action because the goal is still a “commitment” to fiscal reform, its Japan sovereign analyst told Reuters.

“No, failure to meet the target is not a trigger,” Moody’s Christian de Guzman said in an interview with Reuters on Monday. “Even six to seven years ago we were saying they are not going to hit the target. But even back then, we did not pursue any sort of negative rating action.”

If Japan abandons that commitment and significant deterioration in the fiscal deficit leads to much higher debt, Moody’s would examine the pillars of the rating, he said.

De Guzman also spoke about the potential for Japan to raise interest rates further and its impact on Japanese fiscal and monetary policy.

“We expect the Bank of Japan (BOJ) to take a very gradual approach to normalisation,” he said.

“That means they (the government) have some time to adjust their fiscal settings to prepare for a time when interest rates at some point could rise even higher,” de Guzman said. “We don’t see that happening in let’s say one to two years.”

Fiscal reform has become an urgent task in Japan since the central bank in March ended years of negative interest rates and other unconventional policy measures that had kept borrowing costs extraordinarily low.

Public borrowing is now more than twice the size of the economy, by far the highest proportion among industrialised nations.

The government has pledged a primary budget surplus by the next fiscal year, a target many analysts regard as optimistic. The primary budget balance, which excludes new bond sales and debt-servicing costs, indicates to what extent policy measures can be financed without issuing debt.

“The government won’t be able to achieve the target,” de Guzman said. As long as the government sticks to spending and revenue reform commitments, failure to meet the target will not trigger any rating action, at least for the time being, he said.

“I don’t think those are forthcoming yet. Still, I think it’s signalling there’s a commitment, and I think it’s important to anchor that commitment.”

Moody’s rating for Japanese credit was last set in late 2014 at A1 with a stable outlook.

(Reporting by Tetsushi Kajimoto; Editing by Christopher Cushing and Susan Fenton)

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