September 21, 2020

S.&P. Downgrades Japan’s Outlook to Negative

HONG KONG — Nearly seven weeks after a powerful earthquake and tsunami hit northeastern Japan, the Japanese economy is still struggling to return to normal, and the country faces reconstruction costs that could severely strain its already stretched public finances.

The latest warning about the country’s fiscal health came on Wednesday, when Standard Poor’s lowered its outlook on Japan to negative, saying that the massive costs of rebuilding the devastated areas — which it estimated as high as ¥50 trillion, or $612.6 billion — could lead to a lower credit rating unless the government steps up its efforts to keep high government debt levels from rising much further.

The ratings agency kept its long-term rating for the Japanese economy, which it had downgraded in January, unchanged at AA-. But its now negative outlook highlighted the huge uncertainty that overshadows the country’s recovery from the March 11 disaster.

Nearly 26,000 people are missing or have died, tens of thousands of buildings were flattened and hundreds of thousands of cars destroyed. The flow of components and spare parts needed by manufacturers was thrown into disarray, and damage to the Fukushima Daiichi nuclear power station severely disrupted power supplies in key parts of the country.

Expected power shortfalls during the hot summer months could set back businesses in many parts of the country for months to come, analysts say.

Statements from Sharp, the electronics manufacturer, and All Nippon Airways, one of the country’s biggest airlines, on Wednesday shed light on the pain and uncertainties felt by many Japanese companies.

“It is extremely difficult at this time to reasonably estimate the impact of the earthquake on our financial results, which will be broad across our entire business activities from production to sales,” Sharp said in a statement. ANA said a sharp fall in air traffic after the quake had cost it ¥19 billion in revenue.

Earlier this week, Canon lowered its annual profit and sales forecasts, while Toyota has said it will take months until production at its plants can return to pre-quake levels.

Consumer spending, meanwhile, also has been badly hurt by the disaster. The Japanese government reported Wednesday that retail sales in March slumped 8.5 percent from the same period a year earlier, the biggest drop in 13 years, and a larger fall than analysts had expected.

A large rebound in consumption “looks unlikely in the near future,” Masamichi Adachi, an economist at JPMorgan Chase in Tokyo, commented in a research note. “The concern on the development at the Fukushima Daiichi nuclear plant is expected to persist for while, and consumers appear to be reluctant to spend.”

All of this has bludgeoned an economy that was already burdened by feeble growth, deflation, an aging population and high government debt levels before the earthquake struck on March 11.

Standard Poor’s estimated Wednesday that Japan’s reconstruction costs could be in the range of ¥20 trillion and ¥50 trillion.

The extent of environmental contamination in northeastern Japan remains unknown, and although supply chains are expected to normalize, some manufacturers could decide to move a greater share of production offshore

In addition, the massive disruption to manufacturers’ supply chains could undermine the dominant positions that many companies have in their sectors, said Takahira Ogawa, ratings analyst at Standard Poor’s, in a conference call.

Although the disasters are unlikely to hurt the economy’s long-term growth potential, that potential is in any case muted. Growth in the medium term is unlikely to rise much above an annual rate of 1 percent, S.P. said.

The ratings agency forecast that net general government debt could reach 145 percent of gross domestic product in the business year that ends in March 2014 — up from its previous projection of 137 percent.

The vast majority of Japanese government debt is held by domestic investors, and despite its other problems, Japan continues to run a current account surplus. Analysts say that this means any debt rating downgrade would be unlikely to badly undermine the Japanese debt markets or sharply raise government borrowing costs.

Indeed, Japanese government bond yields were little changed after the ratings agency’s move, while the Nikkei 225 stock index ended the day 1.4 percent higher.

Still, government officials on Wednesday rushed to reassure investors about the state of Japan’s public finances.

“The government at present is doing its utmost for disaster relief and reconstruction. It is important to pursue fiscal reform at the same time,” Finance Minister Yoshihiko Noda said, according to Reuters. “Fiscal reform is something we cannot avoid.”

However, Japan’s options for stimulating the economy without raising more debt in the long run are limited.

The central bank cannot lower interest rates, which are already near zero, meaning that the support measures it has announced in the wake of the earthquake have focused on facilitating lending and pouring liquidity into the financial markets. Economists say that at the Bank of Japan’s policy meeting on Thursday the central bank may further beef up a program to purchase government and corporate bonds.

Parliament, meanwhile, is expected to pass a supplementary budget of ¥4 trillion. Debate on a much larger secondary budget covering full-scale rebuilding has started, said Mr. Adachi, the JPMorgan economist, but there is as yet little clarity about how big this will be and how it will be financed.

Meanwhile, the downgraded outlook for Japan again spotlighted the huge debt levels at many of the world’s developed economies. Government debt in Japan, the United States and several European countries — notably Greece, Portugal, Spain and Ireland — have soared in recent years, intensifying the pressure on policy makers to introduce painful fiscal reforms.

Last week, S.P. issued a similar warning to the United States, saying that the country’s AAA rating was under threat because of budget deficits and the lack of clarity about how the government intends to reduce the debt burden.

Article source: http://www.nytimes.com/2011/04/28/business/global/28yen.html?partner=rss&emc=rss

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