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Moody’s cuts outlook for Japan credit rating

Moody's downgrades Japan rating outlook from stable to negative on massive national debt

TOKYO (AFP) ― Ratings agency Moody’s on Tuesday cut its outlook on Japan’s sovereign debt to “negative,” arguing that government policy may not be strong enough to contain the industrialized world’s biggest debt.

The move will put further pressure on Japan’s center-left Prime Minister Naoto Kan, in power less than a year, with legislative gridlock in parliament threatening his reform agenda and imperiling his leadership.

Last month rival ratings agency Standard & Poor’s cut Japan’s credit rating for the first time since 2002, accusing the government of lacking a “coherent” strategy to ease its mountainous debts.

Moody’s previously held a “stable” outlook on Japan’s “Aa2” rating, the third highest on a scale of 19, and analysts said the outlook change would likely lead to a downgrade for Japan from the agency.
Morning commuters make their way to work at a station in Tokyo. (Bloomberg)
Morning commuters make their way to work at a station in Tokyo. (Bloomberg)

“The rating action was prompted by heightened concern that economic and fiscal policies may not prove strong enough to achieve the government’s deficit reduction target and contain the inexorable rise in debt, which already is well above levels in other advanced economies,” Moody’s said.

Japan has the industrialized world’s highest debt, at around 200 percent of GDP, after years of pump-priming measures by governments trying in vain to arrest the economy’s long decline.

A rapidly ageing population, entrenched deflation and a feeble economy have made it hard for lawmakers to curb borrowing.

Moody’s cited the pressures caused by Japan’s high budget deficit, persistent deflation and the greying society, combined with “uncertainty over the ability of the ruling and opposition parties to fashion an effective policy reform response”.

Kan has seen his approval ratings tumble amid legislative gridlock over funding for his budget for the upcoming fiscal year as the opposition pushes for a general election.

Hiroshi Watanabe, economist at Daiwa Institute of Research, said that “once the outlook is changed, it will likely to lead to a downgrade”.

However, he added: “Japan has big fiscal debts but there is no immediate risk of collapse. We don’t have to be too alarmed.”

Economists agree Japan’s situation is not on the level of eurozone states that have seen borrowing costs soar on fears for their fiscal integrity, given the concentration of debt at home makes it less vulnerable to market whims.

The government has been able to fund its growing fiscal gap by raising money in the domestic market, with around 95 percent of the country’s huge debt held domestically via banks and pension schemes.

Japan’s ability to finance its debt is therefore seen as sustainable for now, but analysts warn pressures will increase as the population ages and dips into savings to spend in retirement.

Moody’s noted that while a bond funding crisis is “unlikely in the near- to medium term, pressures could build up over the longer term which should be taken into account in the rating.”

Kan, Japan’s fifth premier in five years, has pledged to drive tough reforms through the divided parliament, to spur growth and reduce a public debt mountain twice the size of the five-trillion-dollar economy.

But the premier, who took power last June, has struggled to tackle entrenched economic and social woes at a time when the conservative opposition controls the upper house and has threatened to block crucial budget bills.