Moody’s cuts Japan rating, blaming politics

Moody’s Investors Service cut its rating on Japan’s government debt by one notch to Aa3 on Wednesday, blaming a build-up of debt since the 2009 global recession and revolving-door political leadership that has hampered effective economic strategies.

Japan is preparing to elect its sixth leader in five years to replace unpopular Prime Minister Naoto Kan, under fire for his handling of the response to a March tsunami and subsequent radiation crisis at a crippled nuclear power plant.

The downgrade, while not out of the blue, served as another reminder of the debt burdens that nearly all of the world’s major advanced economies shoulder. The United States lost its top-tier AAA rating from Standard & Poor’s earlier this month, and Moody’s warned in June that it may downgrade Italy as Europe’s sovereign debt crisis festers.

“Over the past five years, frequent changes in [Japan’s] administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies,” Moody’s said.

Moody’s had warned in May that it might downgrade Japan’s Aa2 rating due to heightened concerns about faltering growth prospects and a weak policy response to rein in bulging public debt, already twice the size of its $5-trillion economy.

Finance Minister Yoshihiko Noda, a fiscal conservative who has joined the race to succeed Kan, said he wanted to refrain from direct comment on Moody’s downgrade.

But he added: “Recent JGB auctions have met favourable demand and I don’t see any change in market confidence in JGBs.”

Analysts said the downgrade was hardly a surprise and the bond market reaction should be muted.

“I had expected that the rating cut would have taken place after the election for the leadership of the [ruling] Democratic Party of Japan. But looking at the candidates, there seems to be nobody among them who would seriously tackle financial reform, so that’s why Moody’s went ahead and cut the rating,” said Yuuki Sakurai, CEO and president of Fukoku Capital Management.

“Moody’s probably took the view that Japan’s finances will continue worsening.”

Japan’s next leader has a mountain of challenges ahead, from battling a soaring yen and forging a post-nuclear crisis energy policy to rebuilding from the tsunami and reining in public debt, while paying for reconstruction and the bulging costs of an ageing society.

The government on Thursday unveiled steps to help firms cope with the yen’s recent rise to record highs, including a $-00 billion emergency credit facility aimed at making it easier for Japanese companies to buy foreign firms.

It also said it would ask major financial firms to report on dealers’ currency positions for the period to the end of September, an apparent attempt to curb speculation.

“We are watching more carefully than before whether there is any speculative activity in the market. We won’t exclude any options and will take decisive action when necessary,” Noda told a news conference to announce the government measures. Noda’s chances of winning an August 29 ruling party leadership race to pick Kan’s successor dimmed this week after former Foreign Minister Seiji Maehara, who says beating deflation should be the top priority, reversed course and decided to run.

Tax hikes and timing
Most of the seven DPJ candidates eyeing the top job agree Japan must eventually raise its 5% sales tax to help fund the ballooning social welfare costs of its fast-ageing society. Only Noda, however, favours raising other taxes soon to fund reconstruction of Japan’s tsunami-devastated northeast region, and even he has been toning down that stance lately.

“We have major developments on the political front, and while most people in the market believe Maehara is very likely to win the election, a swift policy response on debt problems is unlikely to come out soon,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

“Several factors make it difficult for Japan to slow the growth of debt-to-GDP and thus drive this rating action,” Moody’s said in a statement, adding that the March 11 earthquake and nuclear crisis had exacerbated Japan’s problems.

The yen barely moved on the downgrade news, trading at around 76.7 to the dollar, while 10-year JGB futures were up 0.08 point at 142.63 at the end of the morning session after initially dipping into negative territory. Japanese stocks eased.

Moody’s said the outlook for Japan’s credit rating was now stable given the “undiminished home bias of Japanese investors and their preference for government bonds, which allows the government’s fiscal deficits to be funded at the lowest nominal rates globally”.

The downgrade brings Moody’s rating for Japan into line with rival agency Standard & Poor’s, which cut Japan’s rating in January to AA minus, the fourth-highest on its scale.

Moody’s downgrade of Japan was its first since 2002, when it reduced the rating to A2, six notches from the top. It had upgraded Japan three times since then, with the last upgrade as recent as May 2009.

Persistent deflation and slow growth has shackled Japan’s economy for years, reducing tax revenues available to the government, which has grown to rely on debt issuance to finance a large part of its budget. — Reuters

Advertisting

South Africa could use a communist party

The SACP is not building socialism, or even social democracy. Sadly, it has become just another party advancing the politics of patronage

Salie-Hlophe accuses Goliath of lying and racism

In response to Goliath’s gross misconduct complaint, Salie-Hlophe says Goliath has ‘an unhealthy obsession with my marriage’

Treasury is still seeking SAA funds

The government has committed an additional R2-billion to the airline, but has yet to pay it out

‘There were no marks on his neck’, Neil Aggett inquest...

The trade unionist’s partner at the time he was detained at John Vorster Square says she now believes his death was not a suicide
Advertising

Press Releases

Boosting safety for cargo and drivers

The use of a telematics system for fleet vehicles has proved to be an important tool in helping to drive down costs and improve efficiency, says MiX Telematics Africa.

Silencing the guns and firearms amnesty

Silencing the guns and firearms amnesty

Gender-based violence is an affront to our humanity

Gender-based violence is an affront to our humanity

UK-Africa investment summit 2020: Think Africa Invest SA

UK-Africa investment summit 2020: Think Africa Invest SA

MTN unveils TikTok bundles

Customised MTN TikTok data bundles are available to all prepaid customers on *136*2#.

Marketers need to reinvent themselves

Marketing is an exciting discipline, offering the perfect fit for individuals who are equally interested in business, human dynamics and strategic thinking. But the...

Upskill yourself to land your dream job in 2020

If you received admission to an IIE Higher Certificate qualification, once you have graduated, you can articulate to an IIE Diploma and then IIE Bachelor's degree at IIE Rosebank College.

South Africans unsure of what to expect in 2020

Almost half (49%) of South Africans, 15 years and older, agree or strongly agree that they view 2020 with optimism.