Japan credit downgrade

Japan Is Jolted By Cut in Rating

Fitch Ratings on Tuesday delivered a surprise jolt to Japan's political leadership, downgrading the sovereign rating and blasting the government for taking a "leisurely" approach to solving the country's spiraling debt problems.

Wall Street Journal,

22 May, 2012

Fitch said it was cutting the sovereign rating to A-plus, putting it on a par with Estonia and Malta, and below the local currency ratings for Asian rivals China and Korea. The firm's action lowers the double-A long-term foreign-currency rating and the double-A-minus local currency issuer default rating to the new A-plus level.

The move comes as parliament is in the midst of debating a bill to raise taxes to help curb the massive deficit. It serves as a reminder to investors that amid concerns about European debt levels, the perceived safe haven of Japan may be short-lived as the debt load continues to rise above 200% of annual gross domestic product, the highest among all industrialized nations. The yen has risen sharply and Japanese government bond yields have fallen to near-decade lows as investors move their money to avoid turmoil in Europe.

Government leaders seized on the news, saying the action shows the importance of passing a hotly debated plan to double the current 5% sales tax in two steps by 2015.

"We need to take this as a message to us that we must firmly implement fiscal reforms," an official with Japan's finance ministry told reporters on condition of anonymity.

The government of Prime Minister Yoshihiko Noda has been trying to push the sales-tax increase through a deeply divided parliament with the prospects for passage uncertain. Many legislators within Mr. Noda's own party are opposed to the measure, and the main opposition party says it will consider supporting it only if the prime minister agrees to step down and call new elections.

But economists say the tax increase, even if approved, is far from enough to solve the problem, and Fitch sharply criticized the government's broader plan to improve the fiscal situation.

"The country's fiscal consolidation plan looks leisurely relative even to other fiscally challenged high-income countries, and implementation is subject to political risk," Fitch said.

The yen weakened on the news, with the dollar jumping to ¥79.83 from ¥79.55 before the announcement. But bolstered by the European debt crisis, the currency remains near its postwar high of ¥75.31, a level that has put a strain on the big exporters that are a cornerstone to the economy.

Ironically, the move is expected to have little impact on the market for the government bonds covered by the downgrade. With approximately 93% of the bonds held domestically, there is little chance of a crisis sparked by a flight of international capital as has been seen in countries such as Greece and Spain. Figures released earlier Tuesday showed that Japan remains the world's largest creditor nation with net foreign assets of ¥253.01 trillion ($3.19 trillion) as of the end of 2011.

"There could be some impact in the market if Moody's and S&P follow suit and cut their ratings to 'A' levels. But I don't think that will happen in the near future," said Takafumi Yamawaki, chief rate strategist in Tokyo at J.P. Morgan.

After sharp rallies in Japanese government bond prices last week, the benchmark 10-year JGB is now around 0.85%, compared with 1.75% for the equivalent U.S. Treasury note.

The timing of the move was seen as a surprise by market strategists.

"It's hard to tell whether now is appropriate. Fitch might have gotten in first as political turbulence continues and trust in the government is insufficient," said Toshihiro Uomoto, chief credit analyst & strategist at Nomura Securities.

Fitch's rating on Japan is now the lowest among the major ratings companies. Moody's lowered its rating to Aa3 last August with a stable outlook. Standard & Poor's maintains a comparable double-A-minus rating with a negative outlook it put in place in April 2011. Both also have warned that Japan faces further downgrades if action on the debt isn't taken. Analysts from the two firms weren't available for comment on Fitch's actions.

Fitch also said the government's failure to act on its fiscal problems could lead to further downgrades. At the same time, it said a major crisis in the JGB market didn't appear to be coming soon.

"A shock to Japan's sovereign-funding conditions, such as a steep and sustained rise in yields, would be strongly negative for the ratings, although Fitch does not consider this likely," it said.