JAPAN: Rating agency Standard & Poor's cuts Toyko's long-term sovereign debt rating for the first time since 2002

Record ID: 463466

  • Title: JAPAN: Rating agency Standard & Poor's cuts Toyko's long-term sovereign debt rating for the first time since 2002
  • Date: 28th January 2011
  • Summary: TOKYO, JAPAN (FILE) (REUTERS) VARIOUS SCENES OF TOKYO SUNSET
  • Embargoed: 12th February 2011 12:00
  • Keywords:
  • Location: Japan, Japan
  • Country: Japan
  • Topics: Finance
  • Reuters ID: LVADQSB0PFO7JRFGPRF716Q495Y9
  • Story Text: Rating agency Standard & Poor's cut Japan's long-term sovereign debt rating on Thursday (January 27) for the first time since 2002, saying the country's government lacked a coherent plan to tackle its mounting debt.
    It reduced the rating by one notch to AA minus, three levels below the highest possible rating and providing a sharp reminder to other developed nations, such as those in Europe and the United States, of the growing concerns about the debt built up during the global financial crisis.
    Politicians and credit ratings agencies have been warning for years that Japan needs to lower its public debt pile, by far the worst among rich nations at double the size of its 5 trillion U.S. dollar economy, but progress has proved elusive.
    Japan's government is well aware of its debt problem but, like governments before it, has struggled to tackle it head on. Just this month, Economics Minister Kaoru Yosano warned that the country faced a fiscal dead end.
    The chief cabinet spokesman said, while refraining from commenting directly on the downgrade, that the government will continue to tackle its bad debts.
    "We want to continue, strengthen our efforts to maintain fiscal discipline and pursue fiscal reform to maintain market confidence," Yukio Edano, Chief Cabinet Secretary told reporters on Thursday following the downgrade.
    Financial experts said the timing of the downgrade was a surprise.
    "Japan's fiscal situation was bad to start with and that was pretty widely known globally. People were discussing when the crisis will hit here. But we weren't able to predict this downgrading so at least the timing of this was a surprise," Barclay's Capital Senior Foreign Exchange Strategitst Masafumi Yamamoto told Reuters.
    "There seems to be no obvious solution in Japan to the problems of low economic growth, deflation, and the aging population. Also there is no strong political leadership in this country. I think it's highly likely these worries were reflected in this current downgrade," he added.
    The yen fell broadly and credit default swaps on Japan widened after the announcement, but markets in the past have not worried too much about the country's high debt because, for now, it is well serviced by ample domestic savings and few foreign investors hold Japanese government bonds (JGBs).
    "Japan's debt funding is not dependent on overseas sources so in that respect it's unlikely the debt problem will become a major crisis (like in Greece or Portugal) that will affect the foreign exchange markets," Yamashita said.
    However, Japan's society is ageing quickly, so social welfare costs will take up an increasing proportion of the budget in the absence of reforms, which S&P said reduces Japan's already weak fiscal flexibility.
    S&P's downgrade leaves its credit rating on Japan one notch below both Fitch and Moody's.
    While other developed countries are tackling massive public debt built up during the global financial crisis, Japan's debt has been growing for years as it tried to revive the economy after a massive property bubble burst in the early 1990s.
    Japan's outstanding long-term government debt is set to reach 869 trillion yen (10.57 trillion U.S. dollars) at the end of March this year, or 181 percent of gross domestic product (GDP), the Ministry of Finance says.
    If short-term debt is added, Japan's liabilities will hit 204 percent of GDP this calendar year, larger than 137 percent for Greece and 113 percent for Ireland, according to the OECD.
    Analysts say a Japanese debt default is unlikely because of Japanese household assets of some 1,400 trillion yen, three times bigger than economic output provide a healthy pool of savings to fund the borrowing.
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