Japanese economy

S&P ‘May Be’ Close to a Japan Downgrade

Bloomberg,

24 November, 2011

Standard and Poor’s said Japanese Prime Minister Yoshihiko Noda’s administration hasn’t made progress in tackling the public debt burden, an indication it may be preparing to lower the nation’s sovereign grade.

“Japan’s finances are getting worse and worse every day, every second,” Takahira Ogawa, director of sovereign ratings at S&P in Singapore, said in an interview. Asked if that means he’s closer to cutting Japan, he said it “may be right in saying that we’re closer to a downgrade. But the deterioration has been gradual so far, and it’s not like we’re going to move today.”

A reduction in S&P’s AA- rating would be a setback for Noda, who took office in September and has pledged to both steady Japan’s finances and implement reconstruction from the nation’s record earthquake in March. It’s unrealistic for Japan to think it can escape the debt woes that have engulfed nations overseas unless it can control its finances, according to Ogawa.

While Japan has enjoyed borrowing costs at global lows for its debt, the International Monetary Fund said in a report released on its website yesterday there’s a risk of a “sudden spike” in yields that could make the debt level unsustainable. Developed nations are struggling to retain investor confidence in their bonds after borrowing deepened with the global recession and financial crisis. Germany yesterday failed to get sufficient bids to sell all of the 10-year securities it offered to sell.

‘Comprehensive’ Plan

S&P has had Japan on a negative outlook since April. Ogawa said the nation needs a “comprehensive approach” to containing its debt burden, which the government projects will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction.

The yen pared gains after Ogawa’s remarks and traded at 77.15 against the dollar as of 3:23 p.m. in Tokyo. Yields on Japan’s benchmark 10-year government bond rose to as high as 0.98 percent today from the previous close of 0.965 percent before the nation’s markets shut yesterday for a holiday. The Nikkei 225 Stock Average dropped 1.8 percent to 8,165.18, its lowest close since March 2009.

“The events in Europe show us that when you lose market confidence at some point, the situation deteriorates fast,” Ogawa said. “Politicians need to act with the understanding that they’re running out of time” to fix the nation’s finances. “If you don’t act early, it’ll become even more difficult” to maintain market trust, he said.

Tax Increase

Japan’s lower house of parliament today approved legislation that would add an additional 2.1 percent levy to an individual’s annual payment. Lawmakers revised the government’s proposal to extend the period of the measure to 25 years, from 10 years, to help pay for earthquake rebuilding. The measure takes effect in 2013.

“Just because this passes doesn’t mean that it’s positive for public finances,” Ogawa said. “Politicians are squabbling over the minute details, while avoiding what’s most important.”

While Japan’s policy makers have signaled they will double the nation’s sales tax from 5 percent by around 2015, a bill has yet to be enacted.

Moody’s Investors Service cut the nation’s debt rating by one step to Aa3 on Aug. 24. S&P lowered Japan to AA- in January. Fitch Ratings also has Japan at AA- with a negative outlook.

“Absent an offsetting effect from more rapid growth, debt dynamics could deteriorate precariously,” the IMF said in a report published on its website. “Once confidence in sustainability erodes, authorities could face an adverse feedback loop between rising yields, falling market confidence" and "a more vulnerable financial system," it said.

Politically, Noda is struggling to find solutions that the opposition political parties will accept, said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute Inc.

‘‘This shows how political compromises can hinder what needs to be done for the economy,’’ Kumano said.