Moody’s Investors Service yesterday warned that it may cut Japan’s sovereign rating if government policies fall short of a comprehensive tax reform needed to bring ballooning public debt under control.
The US dollar blipped up against the yen after Moody’s changed the outlook on Japan’s Aa2 rating to negative from stable, although government bond futures showed little reaction and maintained earlier gains.
Japan’s struggle to put a lid on its ever-rising public debt, which has ballooned to double the size of its US$5 trillion economy, has -triggered a Standard & Poor’s rating cut and a slew of warnings from other rating agencies.
Analysts point out that Japan’s reliance on domestic investors who hold about 95 percent of its debt shields it from the sort of turmoil that has rattled high-debt euro zone economies and explains the subdued market response to rating agencies’ stern messages.
Moody’s acknowledged that a funding crisis was unlikely in the medium-run, but warned that without urgent government action debt pressures would pile up over time to reach a dangerous tipping point.
“Although a JGB [Japanese -Government Bond] funding crisis is unlikely in the near to medium term, pressures could build up over the longer term which should be taken into account in the rating, even at this high end of the scale,” it said in a statement.
Neither Japanese Minister of State for Economic and Fiscal Policy Kaoru Yosano nor Japanese Finance Minister Yoshihiko Noda would comment on Moody’s action.
Some analysts say that Moody’s outlook cut and last month’s rating downgrade by S&P may play into the hands of Japanese Prime Minister Naoto Kan and his allies by highlighting the dire state of Japan’s finances.
“Credit downgrades by international rating agencies will raise awareness among the Japanese population on the seriousness of the Japanese public sector finance. Such perception by the Japanese population may help Japanese politicians get their act together in fixing fiscal problem,” said Takuji Okubo, chief Japan economist at Societe Generale.
One concern of rating agencies and economists alike is that a political deadlock in the divided parliament may stump Kan’s efforts to get public finances in order. Another worry is that even if the government manages to overcome the impasse its action may prove not ambitious enough.
“The markets may take a body blow from the downgrade in the mid-term if not in the short term,” said Koichi Haji, chief economist at NLI Research Institute in Tokyo.
“If there is uncertainty over the passage of the next fiscal year’s budget and related bills, there may be some repercussions such as domestic investors’ reluctance to buy Japanese government bonds by the end of the fiscal year,” he said.
Moody’s said the rating action was prompted by heightened concern that the government’s economic and fiscal policies may get bogged down in political squabbles and prove unable to achieve its deficit reduction targets.
As if to underline the point, a tiny party that was formerly in the ruling coalition confirmed that it would oppose key bills to enact a workable budget.
Standard & Poor’s downgraded its rating on Japanese debt last month, its first cut in nine years, citing similar reasons. That brought S&P’s rating for Japan one notch below Moody’s but to the same level as Fitch, another ratings agency.