As Japan Economy Blooms, Moodys Downgrade Looms

Tokyo, May 30: | Updated: May 31 2002, 05:30am hrs
As a fragile recovery blooms in Japan, investors doubt ratings agency Moodys will act on a rare threat to downgrade the country by two notches as it wraps up one of the most closely watched credit reviews in years.

A day ahead of the agencys self-imposed May 31 deadline to finish its politically charged review, financial markets are betting Moodys Investors Service will cut Japans long-term local currency rating by one notch rather than two.

But the downgrade would still sting with humiliation, putting the worlds top creditor nation and second-richest economy on a par with the local currency ratings of the Bahamas and Hungary.

Moodys decision is widely expected to be a positive surprise, said Yuuki Sakurai, general manager of debt trading at Fukoku Mutual Life Insurances securities investment department.

Moodys began its review in February, citing slow progress on economic reforms, three years of profit-crushing deflation, a frail economy, ballooning public debt and fragile banking sector.

Structural problems still fester. Japans public debt, for example, remains the worst in the industrialised world at 130 per cent of gross domestic product and looks set to hit a staggering 140 per cent or $5.6 trillion by next March. However, an export-driven rebound in the economy is preventing some problems from getting uglier.

Deflation fingered by the government as the source of the countrys economic ills has not gone away, carving into profits in nearly every industry. But a few scattered price rises recently are helping to blunt some of the impact.

Banks, too, are a little happier. The top seven banks, which all suffered staggering losses in the year to March while taking crippling loan-loss charges to pare back $217 billion in bad loans, are all forecasting profits this year.

Much of the credit is due to a swift recovery in the US and other Asian economies, along with the yens 14 per cent slide against the dollar from September to January, which has allowed big Japanese exporters to ship more goods.

I think it will be one notch and not two, said Mr Rob Gvozden, a New York-based Asia sovereign strategist at Lehman Brothers.

Given that Japan doesnt seem to be accelerating the decline in its credit quality at this juncture, why not send the correct message, which is ultimately what a credit rating change does it sends a message, he said.