Standard and Poor’s threatened to cut Japan’s sovereign credit rating again, warning the huge cost of last month’s devastating earthquake will hurt already weak public finances unless bickering politicians can agree to raise taxes.
It affirmed its long-term sovereign credit rating on Japan at AA minus — the lowest among the major agencies — but cut the outlook to negative from stable.
The ratings agency cut Japan’s sovereign credit rating in January for the first time since 2002, saying the government had no plan to deal with its mounting debt while adding the administration’s loss of an upper house majority had compounded the problem.
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Public debt, already twice the size of the US$5 trillion economy, is set to swell as the country faces reconstruction costs following the March 11 earthquake and tsunami that could reach ¥50 trillion (US$613 billion), S&P said.
“If there are no revenue enhancing measures such as tax increases, we expect the central and local governments to bear most of this cost,” the agency said.
S&P said the downgrade of the ratings outlook meant that a cut in the actual rating could follow over the next two years if there is no fiscal consolidation.
AA minus is S&P’s fourth-highest rating and puts Japan on a par with S&P’s rating for Saudi Arabia and one level below of Spain.
Moody’s Investors Service warned in February it might cut its Aa2 rating — its third highest — if government policies fall short of comprehensive tax reform.
Fitch Ratings has an AA rating — the company’s third highest — with a stable outlook.
Just last week S&P slapped a negative outlook on the top-level AAA credit rating of the US, where lawmakers are also squabbling over how to deal with a massive fiscal deficit.
The EU is facing a critical test as the region deals with its worst debt crisis since the single euro currency was launched.
Japan’s government has estimated that the cost of the damage from the magnitude 9 earthquake and tsunami on March 11 could reach just above US$300 billion. A nuclear power crisis resulting from the tsunami has further damaged the economy.
However, S&P projected reconstruction costs at between ¥20 trillion and ¥50 trillion.
It said if government revenues are not boosted, these costs would add 2 percent of GDP to the general government fiscal deficit this year and 1 percent next year. Deficits would remain above 8 percent through 2014, it said.
“Much will depend on Japan’s political leadership and its ability to forge a political consensus on how to offset fiscal measures in the future,” S&P said.
Japan is expected to pass an initial ¥4 trillion extra budget for disaster relief early next month that won’t entail fresh borrowing, but that is just a down payment on the expected cost of rebuilding in Japan’s devastated northeast.
“Given the huge damage from the earthquake, everyone knows that government spending will be massive,” said Junko Nishioka, the chief economist at RBS Securities Tokyo.
“We are not expecting big new government bond issuance for the coming second supplementary budget but political deadlock is likely to heighten the negative risk for sovereign debt,” he said.
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