Aug 24, 2011 (Bloomberg) - Japan’s sovereign-credit rating was lowered by Moody’s Investors Service, which cited “weak” prospects for growth that will make it difficult for the government to rein in the world’s largest public debt burden.
Moody’s cut the grade one step to Aa3, with a stable outlook, it said in a statement today. Rebuilding costs from the March 11 earthquake and tsunami, along with continuing efforts to contain the Fukushima nuclear crisis, may make it hard for officials to meet their borrowing target this year, it said.
The first Japan downgrade by Moody’s since 2002 reflects deteriorating credit quality across developed nations from Italy to the U.S., which lost its AAA status at Standard & Poor’s this month. While the move adds to the challenges of the next Japanese prime minister, scheduled to be picked next week, the impact on bond yields may be limited by what Moody’s described as domestic investors’ preference for government debt.
"I hope this serves as a warning to the soon-to-be new administration,” said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “It’s imperative to begin to raise the sales tax.”
Finance Minister Yoshihiko Noda told reporters that investors in Japanese government bonds continue to trust the administration, while declining specific comment on the move.
Review Since May
Moody’s put Japan’s rating on review for a downgrade in May, calling on the government to step up its efforts to narrow the budget gap. S&P lowered the nation’s grade to AA-, equivalent to the current Moody’s grade, in January, and has Japan under review for a further cut. Fitch Ratings has Japan at AA- with a negative outlook.
Even with the deterioration in its ratings, Japan has enjoyed what Moody’s today called the world’s lowest nominal borrowing costs. Yields on Japan’s benchmark 10-year bonds rose for a third day, to 1.03 percent as of 9:47 a.m. in Tokyo at Japan Bond Trading Co., still down from 1.11 percent at the end of last year.
"We believe that this funding cost advantage will be sustained by considerable institutional and structural strengths, which will prevail even with large budget deficits in 2011 and 2012,” Moody’s said today. Japan relies on foreigners to buy less than 10 percent of its debt, and Moody’s noted that its net international investments total about 50 percent of gross domestic product, the highest such ratio in the world.
Stocks rose even after today’s move, with the Nikkei 225 Stock Average gaining 0.6 percent to 8,783.73 as of 9:08 a.m. in Tokyo. The yen was little changed at 76.71 per dollar.
The lack of market ructions contrasts with the S&P downgrade of the U.S., which was blasted by the Obama administration for being influenced by faulty accounting.
S&P’s Aug. 5 decision roiled global markets and boosted demand for Treasuries, sending the yield on the 10-year note, the benchmark for home mortgages and car loans, to a record low 1.97 percent. The New York-based company, which was blamed in an April Senate report for helping fuel the credit crisis, was criticized by the world’s most successful investor, Warren Buffett, who said the U.S. should be “quadruple-A.”
Moody’s said today’s decision was “prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession.”
Japan’s public debt is projected to reach 219 percent of gross domestic product next year even before accounting for borrowing to fund reconstruction after the March 11 earthquake, according to the Organization for Economic Cooperation and Development.
The government has amassed a debt of 943.8 trillion yen, according to the Finance Ministry, after two decades of fiscal spending to energize an economy hobbled by the collapse of an asset bubble in 1990 and lingering deflation that’s sapped private demand. The yen’s advance to a post World War II high this year also threatens exports, a main driver of the nation’s economic growth.
Prime Minister Naoto Kan’s efforts to reduce Japan’s debt have been stymied by opposition within his party to tax increases. Kan has also said he would step down once a second extra budget and bills for renewable energy and deficit-bond funding are passed, reducing his authority.
The International Monetary Fund said on July 19 that Japan needed to push forward with new tax measures and limit bond issuance to pare its debt. It recommended raising the sales tax to 7 percent or 8 percent in 2012 from 5 percent, then gradually increasing it to 15 percent over several years.
"Insufficient fiscal adjustment could lead to a spike in JGB yields which, even if the effects were contained, could trigger financial volatility and prove highly disruptive,” according to the IMF, referring to Japanese government bonds.
The IMF also said that outstanding government bonds could exceed total financial assets owned by households in five to 10 years barring policy changes, suggesting the government may need to rely more on foreign investors to fund its deficits.
The government has pledged to raise the sales tax to 10 percent by the middle of the decade, a rate that would still be below the IMF’s recommendations. The additional revenue is intended to pay for social welfare for the aging population.
Japan’s government plans total spending of 19 trillion yen over five years to rebuild after a magnitude-9 temblor and tsunami devastated the northeast coast of Japan and triggered the worst nuclear crisis since Chernobyl.
The world’s third-largest economy has shown signs of overcoming its slowdown after the quake, with industrial production rising at the fastest pace in more than 50 years in May. Companies are saying they plan to increase capital spending despite damage they incurred from a temblor that has left around 20,000 people dead or missing.
The yen’s advance against the dollar and signs of a slowdown in the global economy pose risks for Japan’s rebound. Japanese authorities intervened in the currency market for the first time since March on Aug. 4 to try to stem the yen’s gains.