S&P downgrades Japan’s credit

Overdue structural reform blamed

NEW YORK — Standard & Poor’s Corp. said Thursday it had lowered its long-term local and foreign currency credit ratings on Japan from AAA to AA plus.

The downgrades reflect the Japanese government’s “diminished fiscal flexibility, its rising debt levels and its protracted approach to structural reform,” the U.S. credit rating agency said.

S&P affirmed Japan’s A-1+ short-term local and foreign currency sovereign credit ratings, however, and said the outlook remains stable.

S&P’s move follows the downgrade by Moody’s Investors Service Inc., which lowered its rating in September on yen-denominated domestic securities issued or guaranteed by the Japanese government to Aa2 from Aa1 as a reaction to Japan’s massive public-sector debt.

“The government of Japan’s diminished fiscal flexibility will likely persist because of political reluctance to address rigidities in the economy more effectively,” the agency said. “While the nation will be able to restructure its economy . . . a heavy and rising public-sector debt burden will make the adjustment process more difficult.

“Although general government fiscal deficits are projected to have peaked at 9 percent of gross domestic product for the fiscal year ending March 2000 from 2 percent in fiscal year 1993, Japan can only slowly withdraw its fiscal stimulus without aborting any economic recovery, unless it embraces structural reform more aggressively,” it said.

The agency said it does not expect the ratio of government debt to GDP to peak before the middle of the decade.

Finance Minister Kiichi Miyazawa told reporters in Tokyo on Friday that he believes the decision to downgrade Japan’s ratings was a mistake on the part of the agency, noting that interest rates on government bonds are falling to levels near 1.3 percent.

Miyazawa dismissed the move, stressing that the government has “absolutely no intention” of changing its fiscal policy. He added, however, that the government “will continue to be careful about the issuance of new government bonds.”

At a separate news conference, Financial Services Minister Hakuo Yanagisawa said the government is aware of its dire fiscal straits but bond issues are being absorbed smoothly by the market.

“We do not need to be lectured about government bonds,” he said.

S&P said in announcing the downgrades that Japan would benefit by redirecting its expenditure mix away from poorly targeted public works projects in order to maximize the impact of government spending upon domestic demand.

It also cited Japanese banks’ slow progress in reducing their massive nonperforming loans as a major source of concern.

Given the anemic core profitability of the financial system, the agency said, the banks will be unable to increase domestic credit materially in real terms over the next five years. Thus, it said, they will fail to assist Japan in attaining its 2 percent trend line growth rate as they attempt to restore their balance sheets.

“With elections set for (the) House of Councilors in July . . . the government’s commitment to structural reform has faltered. . . . The current government is unlikely to pursue adjustments to pension and health entitlements or to open protected sectors to greater foreign competition.”

S&P, however, said Japan’s still-high AA plus ratings and stable outlook reflect an extremely strong net foreign asset position of more than $800 billion and solid external liquidity.

It said Japan is the world’s wealthiest net external creditor nation and that the Bank of Japan’s gold and foreign exchange reserves are the largest of any central bank.

S&P noted that the yen is the world’s third most traded currency, that Japan maintains a highly skilled workforce and global leadership positions in electronics, automotive and biology sectors, and that its private sector boasts a high savings rate.