Moody’s stripped Japan of its coveted AAA rating on its foreign currency debt yesterday, rekindling some speculation that other major economies may pay for their efforts to revive growth with credit downgrades.
Unlike many of its peers in the the top triple-A category, the world’s No. 2 economy relies mainly on domestic funding. Moody’s combined the cut in the largely symbolic foreign rating with an upgrade by a notch to domestic government bonds.
The move, which Moody’s said would unify all Japanese government debt at a new Aa2 level, had a limited impact on a Japanese bond market bracing for record debt supply to finance the government’s record spending.
It coincided with a survey of Japanese manufacturers that showed sentiment edged up from record lows this month, keeping alive hopes that a disastrous first quarter marked a low point in Japan’s and the world economy’s worst recession in six decades.
But as governments from Beijing to Washington have committed trillions of dollars to kickstarting their economies, ballooning debt and deficits raised questions about the ability of nations such as US or Britain to keep their top credit grades.
“The move to lower Japan’s foreign currency bond rating from Aaa opens the way for speculation about whether Moody’s will take similar actions on other triple-A ratings,” said Kenro Kawano, senior rates strategist at Credit Suisse in Tokyo.
Analysts, however, did not expect markets to change their view of the local debt market, with Japan saddled with the biggest public debt among industrialised nations, but also able to tap a vast pool of domestic savings.
“What we are seeing is an appropriate normalization across Japan’s various debt obligations. Given the size of Japan’s overall public deficit it obviously should not enjoy the highest rating,” said Glenn Maguire, economist with Societe Generale in Hong Kong.
Major stock markets in Europe and most of Asia fell yesterday, reflecting lingering doubts about the strength and timing of the long-awaited economic recovery as signs of improvement ahead go hand in hand with evidence of immediate pain.
Tokyo shares closed 2.4 percent down and the index of top European shares was 1 percent lower tracking Wall Street losses on Friday. But a gauge of Asian markets outside of Japan rose 1.7 percent, pulled up by gains in India, where stocks soared after a resounding election victory by the ruling Congress party.
Yesterday’s monthly Reuters survey of Japan’s top companies followed Friday’s better-than-expected machinery orders data for April and a US consumer survey showing confidence at its highest since last September’s collapse of Lehman Brothers.
US industrial output fell at a slower pace last month and a top European Central Bank policymaker also offered some encouragement yesterday, saying the bank has already done enough to help the euro zone economy.
However, tentative signs of life came against a backdrop of deeper-than-feared first-quarter declines in the US and euro zone economies and signs that companies around the world are still struggling with a slump in global trade and demand.
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