Japan's credit ratings were cut one notch to "AA-" by Standard & Poor's, the third reduction in 14 months for the world's second-biggest economy.
Prime Minister Junichiro Koizumi hasn't done enough to clean up bad loans at the nation's banks and pull the country out of its third recession in a decade, S&P said in a statement. Japan, which had boasted the top "AAA" rating since 1975 until it was downgraded in February last year, now has the lowest credit rating in the G7 industrialized countries and is at the same level as the Czech Republic and Malta.
Koizumi was elected a year ago this month as a reformer who vowed to trim bureaucracy, force the disposal of an estimated Japanese yen 36.8 trillion (US$279 billion) in dud loans at banks and cap public works spending. Japan's 18-month recession and a slide in popularity have limited Koizumi's progress, S&P said.
"You haven't seen the real reforms, the real problems haven't been solved," said Sudesh Mariappa, head of global portfolio management for Pacific Investment Management Co in Newport Beach, California, which owns Japanese bonds. "The expectations for reform were falsely too high and Koizumi's failed to live up to some of those."
Japanese policymakers said they would speed up steps to overhaul the economy and fix the banking system.
``We take it as a suggestion for Japanese policy and we will make efforts to improve Japan's fiscal situation and to accelerate write-offs of bad loans,'' Finance Minister Masajuro Shiokawa said at a regular news conference.
Those remarks helped drive the yen higher. It was at Japanese yen 131.64 to the dollar from Japanese yen 132.16 late Monday in New York.
Japanese bonds fell. The yield on the most recently issued 10-year bond, which carries a 1.5 percent coupon and matures in March 2012, rose 2 basis points to 1.379 percent. A basis point is a hundredth of a percentage point.
The downgrade gives Japan the fourth-highest rating of both S&P and Moody's Investors Service, the second-biggest ratings company after S&P. Moody's said in February it may lower its "Aa3" rating on Japan by as much as two notches.
Investors had expected the S&P downgrade, said Ku Shin, managing director at Banc One Investment Advisors Corp. "The concern now is that Moody's is likely to downgrade," Shin said.
Japan's national debt is forecast to rise to Japanese yen 693 trillion (US$5.2 trillion) by March next year, 40 percent more than the gross domestic product, according to Ministry of Finance estimates.
That's the biggest debt load among the 30-member Organization for Economic Cooperation and Development.
Much of the money has been spent on roads, bridges, airports and dams in a failed bid to pull Japan out of an 11-year economic slump. With little end in sight to the borrowing binge -- Japan will sell Y30 trillion of new bonds this fiscal year -- the rating may be lowered even further.
"At current trends, the debt trajectory is unsustainable," said John Chambers, an S&P analyst.
Lower credit ratings make it more expensive to borrow because investors demand higher interest rates for a perceived increase in risk. Foreigners hold just 6 percent of Japanese government bonds so the yen's losses may be limited, said Jason Bonanca, a currency strategist at Credit Suisse First Boston, the fifth-largest foreign exchange bank.
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