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Japan Faces `Growing' Urgency to Reduce Unsustainable Budget Gap, S&P Says

Standard & Poor’s indicated that a fiscal plan scheduled for next month by Prime Minister Yukio Hatoyama’s government may be key to whether it will cut the nation’s sovereign credit rating.

The proposal will be “an important statement of the government’s commitment” to rein in the deficit, William Hess, director of sovereign ratings for Asia, said in an interview yesterday in Tashkent, Uzbekistan. “Something has to appear to change our assessment for where things could end up.”

At stake for Japan is keeping the AA grade after S&P lowered its outlook for the rating in January, and shoring up confidence that it will avoid contagion from a Greek crisis threatening to engulf other sovereign borrowers. Finance Minister Naoto Kan said this week that Greece has shown the need for Japan to take a “very firm” stance toward reducing debt, which is approaching twice the size of Japan’s economy.

“There is a growing sense of urgency, even though it’s stated very quietly, that the situation isn’t sustainable,” said Hess, who was in the capital of Uzbekistan to attend an annual meeting of the Asian Development Bank.

S&P downgraded Greece’s debt to junk, or below investment grade, last week and followed with cuts to Portugal and Spain. Greece secured an unprecedented 110 billion-euro ($145 billion) bailout package from the European Union and International Monetary Fund to prevent default this week.

Japan Plan

Hatoyama’s government, which faces an election in the upper house of parliament in July, plans to roll out its medium-term fiscal proposal next month. It’s considering targeting a budget surplus or a reduction in the deficit to 3 percent of gross domestic product by 2020 from a 9.4 percent shortfall this year, a government official said on condition of anonymity last month.

“This will be a challenging year for the government to provide a credible plan,” said Hess. “The outlook change reflects the view of where things are headed.”

Japan’s government bonds have yet to signal evidence of investor concern. Benchmark 10-year notes yielded 1.29 percent at the end of last week, little changed from the start of the year and the lowest level among major economies. Japan’s market, unlike Greece, is almost solely composed of domestic investors, with less than 7 percent of holders being foreign as of December.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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