Moody’s cuts Japan debt rating for first time since ’02

Kyodo

Moody’s Investors Service Inc. said Wednesday it has lowered the credit rating of Japanese government bonds by one notch for the first downgrade in nine years, citing the huge budget deficit and debt as well as political instability, which it said has hampered drastic reform initiatives.

The downgrade — from Aa2 to Aa3 with a stable outlook — added to growing concerns about fiscal sustainability in the world’s leading economies, with financial markets already unsettled by debt problems in the United States and Europe. But the latest rating action had been largely expected, and the bond market in Tokyo reacted calmly.

The decision by the U.S. rating agency came despite Tokyo’s efforts to rehabilitate its debt-laden public finances, including a recently announced plan to double the consumption tax to 10 percent in stages by the mid-2010s to help secure funds to cover swelling welfare costs, which have increasingly weighed on the state coffers.

“Several factors make it difficult for Japan to slow the growth of debt-to-GDP (gross domestic product) and thus drive this rating action,” Moody’s said in its report.

The report also said, “Over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies.”

Moody’s raised doubt that the successor to Prime Minister Naoto Kan, who is soon to step down, would be able to pursue the social security and tax reform plan, given the conflicts within the ruling Democratic Party of Japan as well as the divided Diet, in which opposition parties control the Upper House.

The March 11 earthquake and tsunami have undermined Japan’s recovery from the global economic downturn following the collapse of U.S. investment bank Lehman Brothers Holdings Inc. in 2008, as well as from “aggravated deflationary conditions,” it added.

Finance Minister Yoshihiko Noda rejected any prospect the action would immediately make it difficult for the government to borrow by issuing debt.

“Recent auctions for Japanese government bonds have been well subscribed. Confidence in our bonds will not be shaken,” Noda told reporters after Moody’s announcement.

The yield on 10-year government bonds was stable at around 1.02 percent Wednesday morning in Tokyo, almost unchanged from the previous day’s close, with analysts saying the impact from the downgrading seems limited as the move had been widely expected.

Lee Chiwoong, economist at Goldman Sachs Japan Co., said that deteriorations in Japan’s fiscal health have been already shared as public information. “In that sense, (the rating cut) is little of a surprise,” Lee said in his report.

Moody’s previous cut to the rating on Japanese government debt came in May 2002. It subsequently raised it three times to Aa2.