Japan’s Digitalization Effort will have Mixed Credit Impact across Sectors, says Moody’s Report
Japan’s digitalization effort will have mixed credit impact across sectors according to a new report by Moody’s investor services.
Under Prime Minister Yoshihide Suga, Japan's (A1 stable) government is aiming to promote digital transformation (DX) through the newly formed Digital Agency.
The Digital Agency will lead efforts to digitalize Japanese government operations, and to increase the efficiency of public services. To differing degrees, the initiative will shape the credit quality of not only the central, and regional and local governments (RLGs), but also Japan's businesses and financial institutions, and structured finance instruments.
The aim of the government-led initiative is to generate efficiencies in Japan as it is falling behind others in digital adoption and readiness. Businesses that support digitalization could stand to gain, but the rise of new competitors could threaten existing players.
Japan’s new initiative to digitalize government operations and the delivery of public services will bolster policy effectiveness, supporting sovereign credit quality, but will bring mixed credit implications for regional and local governments (RLGs), businesses and financial institutions, according to a new report by Moody’s Japan K.K.
Motoki Yanase, a Moody’s Vice President and Senior Credit Officer:
“Digital transformation will lower operating costs by increasing operational efficiency and dismantling silos between ministries. It could also spur digitalization in the private sector – which if achieved will support economic growth.”
But remote working could bring mixed credit implications to RLGs, some of which could face pressure on their revenues. For instance, fare revenues at RLG-operated mass transit systems will come under pressure as more workers work from home, while property tax revenues could fall as fewer offices are leased out. On the other hand, some local governments could enjoy more tax revenue from companies that open exurban satellite offices.
Meanwhile, businesses that support the digitalization effort, such as startups and companies providing IT infrastructure, stand to benefit from rising demand, but office property and office equipment companies could lose out as remote working takes hold. And financial institutions will benefit from more streamlined operations, although the near-term cost of investing in technology and cyber-risk prevention will be high.
Finally, for the structured finance sector, digital adoption will optimize the origination process, support volumes in an aging society with a shrinking working-age population and strengthen the credit screening process through the use of artificial intelligence. On the flip side, greater digitalization could create cybersecurity risks such as fraud and identity theft.
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