Moody’s Investors Service yesterday cut its rating on Japan’s government debt by one notch to “Aa3,” blaming a buildup of debt since the 2009 global recession and revolving-door political leadership that has hampered effective economic strategies.
Japan is preparing to elect its sixth leader in five years to replace unpopular Prime Minister Naoto Kan, under fire for his handling of the response to a March tsunami and subsequent radiation crisis at a crippled nuclear power plant.
The downgrade, while not out of the blue, served as another reminder of the debt burdens that nearly all of the world’s major advanced economies shoulder, even as policymakers struggle to agree on ways to stimulate sub-par growth without massive new spending.
The US lost its top-tier “AAA” rating from Standard & Poor’s earlier this month, and Moody’s warned in June that it may downgrade Italy as Europe’s sovereign debt crisis festers.
Moody’s new rating on Japan’s debt is three notches below coveted “AAA” status, which Tokyo lost in 1998, but is still classified as high grade. Japan is now the same level as China, which surpassed it last year to become the world’s second-largest economy, and one notch below Italy and Spain.
“Over the past five years, frequent changes in [Japan’s] administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies,” Moody’s said.
Moody’s had warned in May that it might downgrade Japan’s “Aa2” rating due to heightened concerns about faltering growth prospects and a weak policy response to rein in bulging public debt, already twice the size of its US$5 trillion economy.
Japanese Finance Minister Yoshihiko Noda, a fiscal conservative who has joined the race to succeed Kan, refrained from direct comment on Moody’s downgrade.
However, he said: “Recent JGB [Japanese government bond] auctions have met favorable demand and I don’t see any change in market confidence in JGBs.”
Analysts said the downgrade was hardly a surprise and the reaction in financial markets was muted.
“I had expected that the rating cut would have taken place after the election for the leadership of the Democratic Party of Japan. But looking at the candidates, there seems to be nobody among them who would seriously tackle financial reform, so that’s why Moody’s went ahead and cut the rating,” Fukoku Capital Management Inc chief executive officer Yuuki Sakurai said.
Japan’s next leader has a mountain of challenges ahead, from battling a soaring yen and forging a post-nuclear crisis energy policy to rebuilding from the tsunami and reining in public debt, while paying for reconstruction and the bulging costs of an aging society.
The March disasters knocked the economy back into recession and the strength of an expected rebound later this year is being clouded by weak domestic and global demand and recent gains in the yen, which threaten export competitiveness.
The government on Thursday last week unveiled steps to help firms cope with the yen’s recent rise to record highs, including a US$100 billion emergency credit facility aimed at making it easier for Japanese companies to buy foreign firms.
Moody’s said Japan needed to achieve 3 percent nominal growth in its GDP to get the deficit under control and that a government plan to double the 5 percent sales tax by mid-decades was not bold enough.
“That’s not enough. The government knows that as well,” Tom Byrne, Moody’s senior vice president and regional credit officer, said in a telephone interview.
Moody’s said the outlook for Japan’s credit rating was now stable given the “undiminished home bias of Japanese investors and their preference for government bonds, which allows the government’s fiscal deficits to be funded at the lowest nominal rates globally.”
Byrne said that as a rule, the rating was not expected to change for 12 to 18 months.
The downgrade brings Moody’s rating for Japan into line with rival agency Standard & Poor’s, which cut Japan’s rating in January to “AA minus,” the fourth-highest on its scale.
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