S&P Threatens to Downgrade Japan’s Government Debt

Japan’s debt at risk. Is US next? (CNN Money):

NEW YORK (CNNMoney.com) — Credit rating agency Standard & Poor’s raised the prospect of a downgrade in Japan’s sovereign debt rating Tuesday. That’s reigniting fears that the U.S. could be next.

TOKYO -(Dow Jones)- Standard & Poor’s Ratings Services threatened Tuesday to downgrade Japan’s government debt by a notch, saying the young government isn’t fixing the nation’s bloated finances as fast as expected.

Lowering the outlook on Japan’s AA rating to negative from stable, S&P said: “The Japanese government’s diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures.”

The surprise threat to Japan’s rating, the third-highest that S&P assigns, hit the yen and Japanese government bond prices and prompted concern that the move might dim previously robust prospects for bond issuance throughout Asia over the near term.

“The ratings on Japan could fall by one notch if economic data remain weak and measures to boost medium-term growth are not forthcoming, given the country’s high government-debt burden and its weak demographic profile,” S&P said.

Japan, struggling to crawl out of recession after years of subpar growth, is saddled with the worst debt burden in the industrialized world. Promises of fiscal reform have for years taken a back seat to efforts to boost growth with government spending, while the anemic results have weighed on tax revenues.

“The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected,” said S&P, which last changed its Japan rating with a one-notch cut in April 2002.

The S&P move “will be a warning signal” to the Democrats, who came to power in September, of “the importance keeping fiscal policy in order and restricting the budget deficit,” said Calyon Securities chief Japan economist Susumu Kato.

Japanese Finance Minister Naoto Kan declined to comment specifically on the S&P action, but said that fixing Japan’s fiscal woes is a priority.

“I am aware that it is extremely important to maintain fiscal discipline and move ahead with fiscal reforms to retain the trust of international markets,” Kan said at a news conference after a regular Cabinet meeting.

But “I think that we must try to walk a narrow path to achieve both fiscal reform and economic (growth-boosting) measures.”

S&P said the still-high rating for the world’s second-biggest economy was sustained by such strengths as Japan’s status as the world’s biggest net creditor, massive foreign reserves and the yen as a reserve currency.

An S&P analyst indicated during a teleconference that it may take a while for a decision to be made on the rating.

“It would be difficult for the new government to change the current situation soon,” said Takahira Ogawa, director for S&P’s sovereign ratings.

“The policy effects on macroeconomic and fiscal conditions will emerge over two or three years. During the period, if the government can take very solid and feasible measures and the macroeconomic environment will improve, it may be possible for the Japanese rating to return to stable.”

And Japan got a vote of confidence Tuesday, when an analyst at Moody’s Investors Service said its Aa2 rating on the Japanese economy and stable outlook remain intact.

Moody’s is on record “expressing some concerns about the new administration and how quickly it can really put (together) a coherent medium-term fiscal framework,” credit analyst Aninda Mitra told Dow Jones Newswires. “But until that happens, there’s no immediate ratings pressure, although the medium-term concerns remain.”

Fitch Ratings has a stable outlook on its AA-minus rating for Japan.

Yen Slides, JGB Futures Fall

The yen dropped from a one-month high on the S&P announcement, with the dollar popping to Y90.40 from Y89.60, although the Japanese currency later recouped most of its decline. Ten-year Japanese government bond futures fell 0.10 in afterhours trade to 139.28.

S&P’s move boosted the cost of protection on debt regionwide, with the Markit iTraxx Asia ex-Japan’s index of investment-grade credit-default swaps widening five basis points from the morning to 111-116 basis points. Some analysts said the market is becoming defensive, possibly constricting the bond-issuance pipeline.

Still, Japanese market participants didn’t expect a sustained reaction from Tuesday’s move, especially as more than 93% of JGBs are held by domestic investors.

“S&P’s decision was surprising, big news, but I don’t think this the main theme in the market,” said Mitsubishi UFJ Trust and Banking Corp. chief manager Hideaki Inoue. “Players are watching the development of share markets” and the impact on sentiment.

An extra budget, containing Y7.2 trillion in spending to bolster the weak recovery, cleared the Lower House of Parliament Monday and is expected to be enacted by the Upper House Thursday.

But with little room for further stimulus, the government is pressuring the Bank of Japan to help the economy. “Candidly speaking, I still want more” from the BOJ to prop up growth, Finance Minister Naoto Kan told Parliament Tuesday.

He was speaking shortly after the BOJ left its short-term interest rate at 0.1% and forecast prices will continue to fall at least through March 2012–although less sharply than the central bank had previously forecast.

Japan’s net general government debt, forecast to be 100% of gross domestic product at the end of March, “is among the highest for rated sovereigns” and looks set to peak at 115% of GDP over the next several years, S&P said.

The agency said it will look for signs of budget tightening in the government’s medium-term fiscal plan due in the first half of the year, as well as after Upper House elections in July. Calyon’s Kato said the government will likely start to discuss raising the consumption tax–a political taboo at the moment–after the Upper House election and could raise the tax rate from 5% as soon as 2013-2014.

S&P said that if “we conclude that government policies, either on the fiscal side or structural reform side, will moderate the government’s debt trajectory, the ratings could stabilize at the current levels.”

By Kenneth McCallum and Miho Nakauchi, Dow Jones Newswires, 813-6269-2770; [email protected]

(Ditas Lopez in Singapore, Tomoyuki Tachikawa, Megumi Fujikawa and Takashi Nakamichi in Tokyo contributed to this article.)

By Kenneth McCallum and Miho Nakauchi

Source: The Wall Street Journal

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