• Kyodo


Standard & Poor’s Corp. cut Japan’s long-term local and foreign currency sovereign credit ratings by one notch Monday from AA to AA-minus with a negative outlook, putting Japan at the bottom of the credit-rating league in the Group of Seven leading economies.

As reasons for the downgrade, S&P cited the falling popularity of Prime Minister Junichiro Koizumi, political scandals, delays in structural reforms, and the disappointing results of the Financial Services Agency’s inspections of major banks’ nonperforming loans.

It said prompt measures are needed, including further capital injection into banks and more monetary easing.

In November, S&P lowered Japan’s sovereign credit ratings to bring it level with Italy, which had been the agency’s lowest-rated G7 member. Monday’s cut put Japan firmly at the bottom. The continued negative outlook indicates Japan’s ratings could be downgraded further.

The G7 consists of Britain, Canada, France, Germany, Italy, Japan and the United States.

Along with Japan, the local sovereign credit ratings of Israel, the Czech Republic, Hong Kong and Malta are also rated AA-minus by S&P.

The downgrade may deal a further blow to the struggling Japanese economy and to Koizumi.

In Tokyo on Tuesday, Cabinet ministers showed mixed reactions to the downgrade, some taking it seriously and others dismissing it as “too arbitrary.”

“Frankly speaking, Chief Cabinet Secretary Yasuo Fukuda said, “they are cutting too much.”

Fukuda said he believes S&P should have raised Japan’s ratings rather than cut them, as Japan is still the world’s largest creditor nation and has ample foreign currency reserves.

“It’s too arbitrary,” said Finance Minister Masajuro Shiokawa, who also said he took the downgrade as a warning signal and noted Japan will “reflect on” what it should do.

“We must do our utmost to improve fiscal conditions and dispose of bad loans,” Shiokawa said.

Heizo Takenaka, state minister in charge of economic and fiscal policy, said he shares the sense of urgency with S&P regarding Japan’s bad-debt problems and consecutive budget deficits.

“We have the same critical minds in terms of risks,” Takenaka said. “We need to push through reforms.”

Takahira Ogawa, head of the S&P Asian sovereign ratings team, expressed wariness over the government’s dithering.

“We had hoped that the Junichiro Koizumi administration would press for private-sector and governmental reform,” he said. “But given the government’s falling popularity and the problems that have beset key ministers and aides, Standard & Poor’s has lowered its expectation in three key areas.

“We now expect Japan’s general government deficit to remain in the 8 percent (of gross domestic product) range for several years.”

The deficit, coupled with weak economic growth prospects, makes Japan’s fiscal stance “unsustainable,” he said.

Ogawa also said S&P is disappointed with the FSA inspections. Like many economists, he called the agency’s actions on bad loans “limited in scope and proposed remedies” and urged the government to inject more capital into banks.

The audits only covered loans that major banks made to 149 companies.

On Friday, the FSA announced that 13 major banks will book a combined 7.8 trillion yen in loan-loss charges for fiscal 2001, compared with the 6.4 trillion yen they had projected earlier.

“Current levels of provisioning against net impaired assets, either on a reported basis or on an internationally comparable basis, are inadequate,” Ogawa said, adding the financial system “requires further capital injection.”

In the absence of “proper capitalization, the financial sector will be reluctant to expand lending, thus hurting growth and blunting monetary policy,” he said.

The report also expressed disenchantment over other forms of political inaction.

The Koizumi administration “is unlikely to trim pension and health entitlements, or to open protected sectors to greater foreign competition in the near future,” Ogawa said.

Against this backdrop, monetary policy remains “the one avenue left to policymakers to curb the government’s debt trajectory,” he said.

“The BOJ is slated to monetize over 40 percent of the government’s fiscal deficit in the year ending March 31, 2003. Such monetization could change price expectations, and . . . could set the conditions for modest real losses on financial fixed income and banking assets.”

In February, another major credit-rating agency, Moody’s Investors Service Inc., said it will review the Aa3 rating on yen-denominated domestic securities issued or guaranteed by the Japanese government for possible downgrade by one or two notches.

Moody’s had lowered the rating to Aa3 — the equivalent of the S&P AA-minus — in December. But this did not push Japan below Italy’s rating, as in the S&P downgrade.

In November, Fitch Ratings downgraded Japan’s long-term local and foreign currency sovereign ratings to AA from AA-plus with a negative outlook.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.