Investors were unfazed by Moody’s Investors Service’s decision today to lower Japan’s sovereign rating, unlike in the U.S., where Standard & Poor’s roiled global markets when it cut the U.S. AAA ranking for the first time on Aug. 5.
Yields on benchmark 10-year Japanese government bonds, known as JGBs, were little changed at 1.02 percent as of 1:32 p.m. in Tokyo, and the yen hovered near yesterday’s close against the dollar of 76.66, after Moody’s cut Japan’s grade one step to Aa3. When S&P lowered the U.S. to AA+, the market value of global stocks tumbled by $761 billion between Aug. 5 and Aug. 12, according to data compiled by Bloomberg, sparking an investor exodus into Treasuries, with 10-year note yields falling to a record-low 1.97 percent.
The Moody’s move wasn’t a surprise because Japan’s leaders haven’t acted to rein in the nation’s debt, said Yoshimasa Maruyama, a senior economist in Tokyo at Itochu Corp., Japan’s third largest trading company by market value. The difference with S&P is that Moody’s -- which retains an Aaa grade for the U.S. -- has incorporated the element of a nation’s ability to tap investors into its ratings, something that goes beyond levels of debt, according to Maruyama.
Moody’s cited “weak” economic growth prospects, frequent changes of government that prevent long-term budget planning, and a build-up of debt since the 2009 global recession as reasons for cutting Japan’s grade to Aa3. At the same time, it said the rating outlook is stable, and the nation will benefit from low funding costs because domestic demand for government debt is stable and Japan is the world’s largest net creditor.
By contrast, S&P kept the U.S. outlook “negative,” even as the country raises cash at historically cheap levels: 10-year Treasury yields averaged 3.16 percent this year, against about 4 percent the past decade.
“The fiscal situation in the U.S. is deteriorating, but the U.S. hasn’t lost its triple-A capacity to procure money,” said Maruyama. Similarly, the ability of Japan to tap domestic investors in selling debt means that while “Japan’s fiscal situation is deteriorating, it’s not like the market’s headed for a collapse,” he said.
World markets will continue to focus on the “nervousness” sparked by the S&P move, Maruyama said.
The S&P decision on Aug. 5 to cut the U.S. to AA+ with a negative outlook was a “blow to confidence” because it raised questions about the core of the financial system, Mohamed A. El-Erian, Pacific Investment Management Co.’s chief executive and co-chief investment officer, said in an Aug. 8 radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
While S&P said the U.S. was less creditworthy, investors snapped up Treasuries, driving up prices and sending yields to record lows. Yields on the bonds fell 21 basis points to 1.174 percent, according to Bank of America Merrill Lynch’s U.S. Treasury Master index.
The S&P 500 Index of American shares swung by at least 4.6 percent in the four trading days following the change. Gold rose 5 percent.
Equity investors shrugged off today’s Japan downgrade, with the Nikkei 225 Stock Average dipping 0.1 percent as of 1:44 p.m. in Tokyo -- less than the 0.3 percent drop in the MSCI Asia Pacific index.
“We’ve been ignoring Moody’s,” said Taketoshi Tsuchiya, Tokyo-based director of credit trading at Barclays Capital Japan Ltd. “Do you want to sell something that is rated at the range of Aa with a stable outlook?”
‘Clear for All’
Goldman Sachs Group Inc. economists including Tokyo-based Naohiko Baba said “Japan’s finances and debt are basically clear for all to see.” The Moody’s “downgrade does not come as much of a surprise,” they wrote in a note.
Even so, the cost of insuring Japan’s sovereign debt against default rose, with five-year credit default swap contracts up 2.5 basis points to 111.5 as of 12:09 p.m. in Tokyo, Deutsche Bank AG prices show. The Markit iTraxx Japan index jumped 7 basis points to 153, according to Deutsche Bank. That’s the highest level since June 10, 2010, data provider CMA prices show.
Moody’s put Japan on review in May, calling on the government to step up efforts to narrow the budget gap. S&P lowered the nation’s grade to AA-, equivalent to the current Moody’s grade, in January, and has the nation under review for a further cut. Fitch Ratings has Japan at AA- with a negative outlook.
Contrast in Reaction
Prime Minister Naoto Kan’s government had no reaction to the Moody’s announcement, with Finance Minister Yoshihiko Noda declining specific comment on the news when asked by reporters in Tokyo today. By contrast, the Obama administration criticized the S&P move, with the Treasury Department telling the company it had overestimated future national debt by $2 trillion.
S&P said the discrepancy didn’t affect its decision, and based its conclusion on the U.S. government becoming “less stable, less effective and less predictable.”
Warren Buffett, the world’s most successful investor, said the U.S. should be “quadruple-A.” The billionaire chairman of Omaha, Nebraska-based Berkshire Hathaway Inc. said the decision doesn’t reflect any inability of the U.S. to pay its debts.
U.S. Vice President Joe Biden predicted the U.S. and Japan would both rebound from their respective challenges, speaking yesterday in Tokyo.
“While you’re struggling to deal with one of the greatest natural disasters any country has faced and we are dealing with getting our budget in order, there are voices in the world who are counting us out,” Biden said on the final leg of an Asia tour. “They’re making a very bad bet.”