Japan debt rating threat may hasten tax hike push, which could further cripple the economy

The threat of a cut to Japan's credit rating adds pressure on Prime Minister Naoto Kan to raise taxes as he wrestles with financing quake rebuilding without adding to the world's biggest public debt burden.

Standard & Poor's lowered its outlook Wednesday to "negative" on Japan's AA- local currency rating, estimating that costs stemming from the earthquake, tsunami and nuclear crisis may boost budget deficits by 3.7 percent of gross domestic product through 2013.

Higher taxes may undermine consumer confidence already hammered by the disaster, with March retail sales sliding the most in 13 years and analysts forecasting that the world's third-biggest economy will shrink this quarter. A group of lawmakers and former Cabinet ministers highlighted that danger Wednesday, calling on the Bank of Japan to support the recovery by buying more government bonds.

"Tax increases are unavoidable," said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. "As discussions on selling more bonds begin in earnest, we'll hear more calls for the Bank of Japan to ease policy further," she said. The bond market has shown little evidence of concern about Japan's deteriorating sovereign-debt quality. More than 90 percent of government debt is held by domestic investors, dominated by financial companies, which have provided a stable source of financing. (read more)