April 18, 2024

Japan’s Credit Rating Cut by Moody’s

TOKYO — Moody’s, the credit ratings agency, lowered Japan’s credit rating by one notch on Wednesday, warning that frequent changes in administration, weak prospects for economic growth and its recent natural and nuclear disasters made it difficult for the government to pare down its huge debt.

Hours after the downgrade, the government announced a $100 billion credit facility to help the Japanese economy ride out a spike in the yen in recent weeks amid the global market turmoil, which has battered Japan’s export-led economy.

“Taking into account that there is a lopsided rise in the yen, I felt that swift measures were needed,” Yoshihiko Noda, the finance minister, told reporters.

Moody’s Investors Service lowered Japan’s grade by one step to Aa3, the fourth-highest rating, the company said in a statement.

The downgrade brings Moody’s rating for Japan in line with Standard Poor’s, which lowered the country’s grade by one notch to AA-minus in January, the fourth highest on its scale. Moody’s had put Japan on review for a downgrade in May.

The action comes after a round of downgrades by major ratings agencies of sovereign debt, and amid concern that the debt crisis in Europe could escalate. On Aug. 5, S. P. cut the sovereign debt rating of the United States for the first time in the country’s history.

Markets in Tokyo largely shrugged off the downgrade, the latest in a line of many.

Trust in Japanese government debt “remains unwavering,” Japan’s finance minister, Yoshihiko Noda, told reporters after the downgrade.

Still, the move, a week before the country’s ruling party is to select a new prime minister, could put additional pressure on the incoming administration to balance budgets. The government financing of the recovery from the March 11 earthquake, tsunami and subsequent nuclear crisis is expected to reach as high as 10 trillion yen ($130 billion).

Even before the disasters, Japan’s debt was expected to soar to almost 220 percent of its gross domestic product next year, according to the Organization for Economic Cooperation and Development, which would rank it as the largest debt-to-G.D.P. ratio in the world. Japan, however, has long been able to borrow at low nominal rates because of unwavering appetite by domestic investors for government debt.

Moody’s said that it was worried by  large budget deficits and the buildup of  government debt. Frequent change in  leadership had prevented the government from pursuing long-term fiscal reform, the agency said, while the recent  disasters had delayed recovery. Meanwhile, weak prospects for economic  growth were also hampering efforts to  curb the country’s debt burden, the  agency said.

Deflation and sluggish growth has  long weighed on Japan’s economy, eroding the country’s tax base and forcing  the government to issue debt to finance  its budget. Meanwhile, spending on  pensions and social welfare has soared  as the country’s population ages.

The global economic crisis further  darkened Japan’s economic outlook, as  has the recent tsunami and nuclear accident. Global market turmoil in recent  weeks has also wreaked havoc with the  Japanese economy, driving up the value  of the yen and hurting its export-led  economy.

The credit facility unveiled on Wednesday aims to spur Japanese spending on corporate acquisitions and resources overseas, according to a statement released by the Finance Ministry.

By spending yen for dollars and other currencies, the ministry hopes that the currency will weaken somewhat. A strong yen hurts Japanese exporters because it makes their goods less competitive and erodes the value of their overseas earnings when repatriated into yen. 

The ministry also said it would step up monitoring of currency markets by asking financial institutions to report on positions held by their currency dealers.

Prime Minister Naoto Kan, meanwhile, is expected to step down by the end of the month amid criticism of his  handling of the response to the disasters, making way for Japan’s fifth  prime minister in six years.

Mr. Noda, the finance minister, is  among a field of candidates to replace  Mr. Kan. He has supported more aggressive steps, including raising taxes,  to tackle the country’s debt. Debate  over Japan’s finances has been sidelined by the country’s recovery and reconstruction needs, however.

This article has been revised to reflect the following correction:

Correction: August 25, 2011

An article on Wednesday about a downgrade of Japan’s credit rating by the ratings agency Moody’s Investors Service misstated Japan’s grade from another agency, Standard Poor’s. It is AA–, not AA. (A grade of AA– is S. P.’s fourth-highest, equivalent to the AA3 rating announced by Moody’s.)

Article source: http://feeds.nytimes.com/click.phdo?i=f82d2f89526d1948621eae07564946ad

Speak Your Mind