More bad news for Japan

Moody's Downgrades Japan Debt Rating To Aa3

Nikkei.com

Wednesday, August 24, 2011

TOKYO (Dow Jones)--Moody's Investors Service downgraded Japan's sovereign debt rating Wednesday, putting fresh pressure on the country's political leaders to repair its finances, the worst in the industrialized world.

Moody's said it was cutting Japan's government bond rating to Aa3 from Aa2, citing "large budget deficits and the build-up in Japanese government debt since the 2009 global recession."

Like the U.S., Japan is facing increasing criticism over its financial condition, but its finances are in far worse shape with nearly half of the annual central government budget financed by bond issuance and the country's gross debt now equal to more then 200% of annual GDP. 

That compares with a U.S. debt load at an estimated 75% of GDP.

But Moody's also suggested that a debt crisis in Japan was at least some years away.

It said that the outlook on its new rating is stable, noting that steady demand for Japanese bonds from domestic buyers has kept the nation's bond yields at low levels compared with other countries.

"We believe that this funding cost advantage will be sustained by considerable institutional and structural strengths, which will prevail even with large budget deficits in 2011 and 2012," Moody's said.

Japanese Finance Minister Yoshihiko Noda declined to comment on the Moody's move, but he defended the creditworthiness of Japan's sovereign debt.

"The smooth sales of Japanese government bonds at recent auctions show that confidence remains unshaken," Noda told reporters after the downgrade. Japan's domestic news agencies quoted Prime Minister Naoto Kan as calling the action "regrettable."

The bond market was unruffled, with the yield on the 10-year JGB rising only slightly to 1.020%.

"This was no big surprise, and the fact that it was limited to just one notch should also limit the impact," said RuiXue Xu, strategist at RBS Securities Japan.

The yen fell briefly on the news, with the dollar rising to Y76.78 from Y76.66 before retracing its gains.

Credit default swaps, which measure the market's view of the risk of a bond, were unchanged from Tuesday's levels at 109 basis points.

The action puts Moody's rating on a par with other major ratings companies Standard & Poor's and Fitch Ratings, both of which rate Japan's sovereign local currency debt at AA- with a negative outlook.

The downgrade comes less than a week before Japan is to select a new prime minister after a string of leaders who have lasted little more than a year.

Moody's cited Japan's long-running political problems as a reason for the downgrade, saying that "over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies."

In addition to its structural debt problem, Japan is facing an additional Y15 trillion-Y20 trillion in spending to recover from the devastating March 11 earthquake and tsunami in the northeast of the country.

Despite the size of the debt load, some political leaders remain reluctant to support any tax increases for now, saying such a move could undermine a fragile economic recovery.

A tax hike would likely focus on raising the current 5% consumption tax, possibly to 10% or 15%. But such a move would still leave large deficits in place that would be needed to be offset by either spending cuts or additional levys. The current government plan in any case envisages no increase until sometime around the middle of the decade.

Increasing that gulf, private and public-sector forecasts have lowered Japan's expected growth rate. The government said earlier this month that it expects gross domestic product to grow just 0.5% in the current fiscal year, with 2.7%-2.9% growth seen in the following fiscal year.