1. SP affirms Japan’s debt rating as negative rates lower govt debt burden

SP affirms Japan’s debt rating as negative rates lower govt debt burden

The rating agency said it expected Japan's nominal economic growth to average 2 percent, and negative interest rates on newly issued bonds to ease and stabilise the government's debt burden over the next two years

By: | Tokyo | Published: September 1, 2016 5:58 PM
GST, Structural economy, Standard and Poor's Global Ratings, Bankruptcy law, Chinese economy, India ratings The rating agency said it expected Japan’s nominal economic growth to average 2 percent, and negative interest rates on newly issued bonds to ease and stabilise the government’s debt burden over the next two years (Reuters)

Standard & Poor’s Ratings Services on Thursday affirmed Japan’s A+/A-1 sovereign debt rating and maintained a stable outlook despite its heavy debt burden, saying political stability and stable financial system offset fiscal woes.

The rating agency said it expected Japan’s nominal economic growth to average 2 percent, and negative interest rates on newly issued bonds to ease and stabilise the government’s debt burden over the next two years.

The government has benefited from the Bank of Japan’s radical step to adopt negative interest rates, which has pushed yields on Japanese government bonds (JGBs) down near or even below zero.

“Currently, at least 70 percent of Japanese government securities yield negative returns. Japan has by far the world’s highest debt rollover ratio (including short-term debt),” S&P said in a statement.

“These negligible yields will thus soon pass through to, and bring down, the government’s borrowing costs.”

The agency said it could raise Japan’s sovereign ratings if it significantly improved its fiscal health, which would likely be brought on by stronger economic growth.

However, S&P warned it could lower its sovereign ratings if policymakers failed to sustain growth, keep deflation at bay and eventually stabilise the government debt burden.

A rise in real interest rates would “severely strain the government’s debt dynamics,” it also said.

Moody’s Investors Service on Tuesday affirmed Japan’s A1 sovereign debt rating and maintained a stable outlook, citing ultra-low funding costs and continued progress in government efforts to reflate the economy.

Japan’s economic growth ground to a halt in April-June as weak exports and shaky domestic demand prompted companies to cut spending, putting fresh pressure on Prime Minister Shinzo Abe to come up with policies for more sustainable growth.

The government announced last month an economic package with 13.5 trillion yen ($133 billion) in fiscal measures, in a bid to help the economy deflect external headwinds and sustain a moderate recovery.

But the plan will take time to pay dividends and sceptics say there is not enough new spending.

The Bank of Japan also expanded stimulus in July via a modest increase in purchases of risky assets, and it remains under pressure to do more in September, when it conducts a thorough assessment of the effects of its monetary policy.

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