Moody's Puts Japan on Review for Downgrade

by: Research Recap

Moody’s has placed the Government of Japan’s Aa2 local and foreign currency bond ratings on review for possible downgrade, and taken a number of related ratings actions.

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

Although a JGB funding crisis is unlikely in the near- to medium-term, pressures could build up over the longer term, and which should be taken into account in the rating, even at this high end of the scale. 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.

More specifically, factors driving the decision are:

  1. The much larger than initially expected economic and fiscal costs of the March 11 earthquake are magnifying the adverse effects imparted by the global financial crisis from which Japan’s economy has not completely recovered.
  2. Concern that the policy framework will continue to fall short of achieving deficit reduction on a timely basis.
  3. The vulnerability of a long-term fiscal consolidation strategy to worsening domestic demographic pressures, as well as to possible, renewed shocks in a fragile and uncertain, post-crisis global economic environment.

The rating action does not affect the Aaa foreign currency bond and bank deposit ceilings, or the Aaa local currency bond and bank deposit ceilings. The ceilings act as a cap on ratings that can be assigned to the domestic or foreign currency obligations of other entities domiciled in the country. The short-term rating is unaffected and remains unchanged at P-1.