By Makiko Yamazaki
TOKYO, Oct 27 (Reuters) - Moody's sees encouraging signs in Japan's return to sustained growth and stable inflation, but a key test will be whether that resilience can withstand future shocks, the rating agency's Japan sovereign analyst told Reuters on Tuesday.
Moody's rates Japan at A1, its fifth-highest investment-grade rating, with a stable outlook, unchanged since its 2014 downgrade of Japan from Aa3.
"We're starting to see what looks more like sustained growth and inflation expectations
that are reasonably well anchored around 2%," said Martin Petch, a vice president at the sovereign risk group of Moody's Ratings.
"That's been something that's changed," Petch said in an interview, referring to a shift from decades of weak growth and chronically low inflation.
Petch declined to speculate on future rating actions, but said Moody's was watching to see if recent changes in Japan's economic and inflation environment prove sustainable, along with reforms that boost productivity and tackle demographic woes.
A key test, he added, is whether Japan can maintain growth and inflation stability through future economic shocks.
"You can generally tell when growth has become sustained when the economy has dealt with a shock," Petch said, pointing out that Japan had coped well with recent energy-price shocks while the central bank keeps up efforts to normalise policy.
LITTLE IMMEDIATE THREAT SEEN TO CREDIT PROFILE
Prime Minister Sanae Takaichi's food sales tax cut and ambitious spending plans rattled bond markets this year, but Petch suggested the measures have posed little immediate threat to Japan's credit profile.
Their fiscal impact would depend on whether the government delivered on its pledge to offset the resulting revenue loss, he added.
Although ministries have sought a record 143 trillion yen ($908 billion) in initial spending requests, Petch said the rise was relatively modest compared with combined initial and supplementary budgets.
This reinforced Moody's view that there has been no meaningful departure from Japan's recent consolidation trend, he added.
But uncertainties hover over the government's 370-trillion-yen public-private investment initiative, Petch said.
These include the extent to which the private sector joins the initiative, and whether it can bring the productivity gains needed to offset Japan's demographic headwinds, he added.
($1=157.4700 yen)
(Reporting by Makiko Yamazaki; Editing by Clarence Fernandez)
