Standard and Poor's (S&P) said yesterday that it had raised its sovereign credit ratings on Japan for the first time to reflect its positive economic outlook and efforts to rein in a massive national debt.
The agency upgraded its foreign and local currency long-term sovereign ratings by one notch to the third-highest AA grade from AA-minus.
It is the first time that S&P has upgraded the world's second largest economy since it started coverage in 1975 and comes five years after it last downgraded Japan due to rampant deflation and slow structural reform.
"The upgrade is based on Japan's progress in fiscal, monetary and structural fronts," S&P credit analyst Takahira Ogawa said in a statement.
"Policymakers have been triply challenged to consolidate fiscal accounts and to restructure the private sector without restoking deflationary pressure. Our assessment is that they are meeting the test," Ogawa added.
The agency gave Japan a stable outlook "based on the expectation that the current government will continue its public sector reform."
"Faster progress than expected could improve the outlook on the sovereign ratings on Japan. Conversely, downward pressure on the ratings could arise if the government's fiscal consolidation efforts stall," S&P said.
In the medium-term, Japan faces demographic challenges and further pension system reform would be needed to cope with the shift, the agency said.
S&P drew protests from the Japanese government with a series of downgrades from the top notch AAA, most recently in April 2002 to AA-minus, which at the time was the worst among the Group Seven industrialized nations.
Since then Italy has been the only G7 nation to have slipped further down the rankings.
S&P predicted that Japan's public debt would stabilize at 133 percent of GDP by the year to March 2013.
At the same time, the central government budget deficit is expected to decline to the equivalent of 5 percent of GDP in the current fiscal year to next March, down from 8.2 percent in the year to March 2003, it added.
Japan's central bank had also "successfully" exited its zero interest rate policy while the Japanese economy is set to grow by about 2 percent a year for the next few years -- twice the level in the decade to 2004, it added.
The Bank of Japan raised interest rates last July for the first time in almost six years as it sought to wean the economy off its ultra-loose emergency monetary policy following an easing of deflationary pressures.
Japan's public debt is the highest among industrialized nations after the government spent trillions of yen on emergency domestic spending packages to try to haul the economy out of its deflation doldrums during the 1990s and early this decade.
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