Moody’s puts Japan on review for downgrade
TOKYO (MarketWatch) — Moody’s Investors Service said Tuesday it put Japan’s Aa2 local and foreign currency bond ratings on review for possible downgrade, due to long-term fiscal concerns in the wake of the March disaster.
“The review has 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,” Moody’s said in a statement.
A Japanese government bond funding crisis is unlikely in the near- to medium-term, Moody’s said.
But it added that “pressures could build up over the longer term,” and said ”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.”
Moody’s cited much-larger-than-initially expected economic and fiscal costs of the March 11 earthquake and tsunami, which it said magnified the effects of the global financial crisis “from which Japan’s economy has not completely recovered.”
It also cited concerns that government policy would continue to fall short of reducing the country’s deficit “on a timely basis,” as well as Japan’s vulnerability to demographic pressures and possible future shocks.
“Preliminary indications are that the direct costs to the government’s budget may amount to around 2%” of gross domestic product, Moody’s said — not including costs that may arise from Tokyo Electric Power Co.’s (TOKYO:JP:9501) (PINK:TKECY) liabilities from its disaster-crippled Fukushima Daiichi nuclear power plant.
Unless Japan can get a grip on its fiscal situation, its debt level “will rise inexorably from a level which already is well above that of other advanced economies,” Moody’s said.
Typhoon hits southern Japan
Typhoon Songda heads north after leaving many thousands of households without power in southern Japan.
Japan’s public debt is already more than twice the size of its economy by some measures, which is the highest ratio in the developed world.
The dollar (U.S.:USDYEN) rose against the yen after the Moody‘s announcement, buying ¥81.60 in afternoon trading, up from an earlier Tuesday low of ¥80.69, according to FactSet Research data.
The Nikkei Stock Average (NIHON:JP:NI225) extended morning gains after the Moody’s news, ending up 2.0% as the weaker yen gave shares of exports a lift. Government data released earlier Tuesday also lifted sentiment, showing manufacturers expect industrial output to recover faster than previously expected in May and June.
Moody‘s warning was the third from a major ratings agency in recent weeks.
Last month, Standard & Poor’s cut its outlook on Japan’s sovereign rating to negative from stable Wednesday to reflect the higher potential for a downgrade after the disaster. S&P’s AA-minus rating on Japan — its fourth-highest — is one notch below Moody’s Investors Service’s Japan debt rating of Aa2.
Four months ago, before the earthquake struck, S&P cut Japan’s rating for the first time in nine years by one notch.
On Friday, Fitch Ratings cut its outlook on Japan, warning that political gridlock and stalled fiscal progress could lead to a downgrade of the AA-minus rating it has on the country.