October 20, 2020

Moody’s Warns of Possible Downgrade to Japan’s Debt Rating

HONG KONG — Moody’s warned on Tuesday that it may downgrade its sovereign debt rating for Japan, joining other ratings agencies in taking a more pessimistic view of the Japanese economy after the March 11 earthquake and tsunami.

The disaster hit an economy that was already struggling with persistently anemic growth, periodic deflation, an aging population and high government debt levels.

Moody’s kept its rating for Japanese bonds unchanged at Aa2, but said its decision to review the rating for a possible downgrade had been prompted by “heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government’s ability to fashion and achieve a credible deficit reduction target.”

Without an effective strategy, the ratings agency said, government debt “will rise inexorably from a level which already is well above that of other advanced economies.”

Although a financing crisis is unlikely in the near- to medium-term, “pressures could build up over the longer term,” Moody’s said. “Moreover, at some point in the future, a tipping point could be reached, and at which the market would price in a risk premium to government debt.”

The Japanese economics minister, Kaoru Yosano, said in a news conference in Tokyo that he was unhappy about Moody’s move but added that the government must preserve fiscal discipline.

“The government and politicians must always bear in mind the need to maintain fiscal discipline and must act to achieve this end,” Mr. Yosano said, Reuters reported.

Unlike most of the rest of Asia, the Japanese economy had not yet fully recovered from the impact of the global financial crisis, and the massive economic and fiscal costs of the March 11 disaster have caused the economy to contract sharply, tipping Japan into its second recession in less than three years.

Data published on May 19 showed that Japan’s economy shrank at an annual rate of 3.7 percent in the first quarter.

A rebound is widely expected to kick in once rebuilding work gathers momentum, and as battered supply chains normalize.

The Economy and Trade Ministry reported on Tuesday that industrial output in April climbed 1 percent from the previous month, a marked improvement from the 15.5 percent plunge in March. The rise was below what analysts had expected, but nevertheless supported the overall picture of an economy that is clawing its way back to pre-quake levels.

Anecdotal evidence — news of factories opening up again and of companies normalizing production plans — has shown that the situation continued to improve in May, economists at Credit Suisse in Tokyo wrote in a research note. Industrial production, they wrote, “is moving toward a V-shaped recovery.”

Still, power shortfalls and the lingering crisis at the earthquake-stricken Fukushima Daiichi nuclear power plant cloud the overall picture.

In addition, Japan’s government debt levels are by far the largest among the world’s major advanced economies, while growth in the medium term is unlikely to rise much above an annual rate of 1 percent, despite the expected post-quake rebound, many analysts say.

Moreover, political infighting hampers the ability of the government to achieve a steady reduction in the budget deficit.

“New fiscal measures are unavoidably necessary to close the primary deficit,” Moody’s said in its report on Tuesday. “To that end, the government intends to introduce a comprehensive tax reform program in June. However, Japan’s divided Diet — in which the opposition Liberal Democratic Party controls the Upper House — and the intensifying level of political challenges” to Prime Minister Naoto Kan “continue to threaten to bog down such efforts.”

The assessments echo those by Standard Poor’s, which downgraded its rating for Japan to AA- in January and lowered its outlook on that rating to negative in late April.

Fitch Ratings also lowered its outlook for Japan to negative last week, and likewise said a “stronger fiscal consolidation strategy” was necessary.

The Japanese stock market, meanwhile, shrugged off the warning from Moody’s. The Nikkei 225 index closed 2 percent higher, at 9,693.73 points, on Tuesday.

The index has recovered from the low of 8,605.15, plumbed in the week after the quake, but remains below the level of 10,360 points, where it was shortly before the quake struck.

Article source: http://feeds.nytimes.com/click.phdo?i=ae94e0aa568d8443ac1f10adc2ad5ac7

Speak Your Mind