Japan’s long-term government bond ratings, which currently stand at a prime Aaa, have been placed under possible downgrade, Moody’s Investors Service announced Thursday.
If realized, it would be the first downgrade for Japan and could lead to higher borrowing costs for both the government and Japanese firms.
The news jolted financial markets in Tokyo, with the benchmark Nikkei average of 225 blue chips on the Tokyo Stock Exchange falling 105.05 points — 0.64 percent — to finish at 16,188.01. The yen fell to 141.70 to the dollar from around 140.
Japan’s Aaa ratings for its foreign currency-denominated debt and bank deposits, along with its Aaa-rated yen-denominated securities issued or guaranteed by the government, were the items up for possible downgrade.
The ratings agency said the review was prompted by deep structural problems in Japan’s economy that have defied conventional policy remedies. These problems include:
1) an apparent lack of consensus by policymakers on a midterm strategy for implementing structural reforms and for managing the economy;
2) a fiscal problem in the public sector that unlike most other highly rated countries will likely continue to worsen over the midterm;
3) signs that Japan’s external position is weakening.
Moody’s action comes as the nation finds itself in a near-political vacuum in which the ruling Liberal Democratic Party is preparing to vote for a successor to outgoing Prime Minister Ryutaro Hashimoto.
Government officials rushed to contain the damage, saying that the fundamentals of the economy remained steady. Deputy Chief Cabinet Secretary Teijiro Furukawa said he would not directly comment on an assessment made by a private firm but pointed to Japan’s huge foreign reserves and net external assets.
“The fundamentals of confidence in the Japanese economy are solid and evident,” he told a regular news conference. Vice Finance Minister Koji Tanami agreed, saying before a separate news conference that the government’s task is to steadily implement its 16 trillion yen economic stimulus package to cover the lack of domestic demand at the moment.
He added, however, that the full effects of the package would not be seen immediately but later in the year.
At the center of concern, Moody’s said, is the potential that Japanese wage-earners will make a massive shift from domestic instruments into foreign currency assets as “Big Bang” financial reforms are implemented, it said. Moody’s, however, also pointed to Japan’s high savings rate as a strength. In addition, it termed the nation’s foreign reserves — held by both the Bank of Japan and the commercial banking system — “considerable.”
Moody’s review will focus on the implications of possible policy responses to the long-term strength of Japan’s fiscal and external payments positions, and on how they could affect the country’s banking sector.
As a result of the review, foreign currency securities issued by eight institutions rated Aaa will be reviewed for possible downgrade, Moody’s said.
These institutions are: Japan Development Bank, Japan Finance Corporation for Municipal Enterprises, Export-Import Bank of Japan, the Tokyo Metropolitan Government, Chubu Electric Power Co., Kansai Electric Power Co., Nippon Telegraph and Telephone Corp. and Tokyo Electric Power Co.
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