S&P downgrades Japan

Written by Reuters | Tokyo | Updated: Jan 28 2011, 09:03am hrs
Rating agency Standard & Poors cut Japans long-term sovereign debt rating on Thursday for the first since 2002, saying the countrys 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. 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 economy, but progress has proved elusive.

The yen fell broadly and credit default swaps on Japan widened after the announcement. Economics minister Kaoru Yosano, who this month said Japans faced a fiscal dead end, said S&Ps move was regrettable. The downgrade reflects our appraisal that Japans government debt ratios already among the highest for rated sovereigns will continue to rise further than we envisaged before the global crisis hit the country and will peak only in the mid-2020s, S&P said.

In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the countrys debt dynamics, in part due to the coalition having lost its majority in the upper house of parliament last summer.

The yen fell broadly, with the dollar rising 1% on the day against the Japanese currency to a session high of 83.20 , and 10-year Japanese government bond futures dipped.

Finance minister Yoshihiko Noda said he wanted to convey the message that Japan would stick to fiscal discipline so as to win market confidence in its fiscal management.

Asked about the yens fall following the downgrade, Noda declined to comment directly, but said currencies make various moves from day to day.

While other developed countries are tackling massive public debt built up during the global financial crisis, Japans debt has been growing for years as it tried to revive the economy after a massive property bubble burst in the early 1990s.

Japan, compared to other developed economies, has the worst fiscal position. Having said that, the reason why Japan was able to sustain its ratings for so long is the fact that the proportion of domestically owned debt was the highest at more than 90% or so, said Thomas Lam, group chief economist at DMG & Partners Securities Pte in Singapore. I dont think this is a shocking downgrade. This is the signal that rating agencies are looking closely at the debt and they should do something about this, otherwise they will eventually face a bigger problem than Europe if they take this for granted.

S&P said the outlook on the long-term rating was stable, reflecting its view that Japans strong external balance sheet and monetary flexibility partially offset pressures stemming from the fiscal side. Japans outstanding long-term government debt is set to reach 869 trillion yen at the end of March this year, or 181% of GDP, the ministry of finance says.