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S&P Affirms Japan’s AA- Credit Rating With Negative Outlook

Japan's Prime Minister Yoshihiko Noda
Yoshihiko Noda, Japan's prime minister. Photographer: Haruyoshi Yamaguchi/Bloomberg

Standard and Poor’s affirmed Japan’s sovereign-debt rating at AA- while maintaining a negative outlook and warning that a downgrade is likely if medium-term growth prospects weaken.

The ranking is supported by an “ample net external asset position, relatively strong financial system, and diversified economy,” S&P said in a statement today, also citing the yen’s role as a “key international reserve currency.” S&P has cut the ratings of European nations including France and Italy this year, along with reducing both the U.S. and Japan last year.

Prime Minister Yoshihiko Noda is struggling to tame the world’s biggest public debt burden while supporting an economy that was hurt by last year’s earthquake and tsunami and shrank an annualized 2.3 percent in the fourth quarter. He’s yet to secure lawmakers’ support for a sales-tax increase intended to put the nation on a stronger financial footing.

“S&P’s rating decision will be put off further into the future, possibly until it will see whether the nation’s consumption tax bill will gain support at the parliament or not,” said Soichi Okuda, chief economist at Sumitomo Shoji Research Institute in Tokyo.

Moody’s Investors Service cut Japan by one step to Aa3 on Aug. 24, citing “the build-up in Japanese government debt since the 2009 global recession.” Fitch Ratings has the nation at AA-with a negative outlook.

Bond Yields

So far, reductions in Japan’s rating haven’t led to a drop in bond prices. The benchmark 10-year government bond yield was at 0.945 percent as of 5:29 p.m. in Tokyo, the second lowest in the world after Switzerland.

In the U.S., Treasuries returned 9.8 percent in 2011, the most in three years, according to Bank of America Merrill Lynch data. Bonds rallied even as S&P stripped the U.S. of its AAA rating in August. Benchmark 10-year yields were 2 percent at the end of last week, versus the record low of 1.67 percent set Sept. 23 and the 10-year average of 3.89 percent.

The negative outlook for Japan means a more than one-third chance of the nation being downgraded by S&P within two years, Takahira Ogawa, director of sovereign ratings in Singapore, said in a teleconference today.

A report today showed a record trade deficit in January as fuel imports surged because of nuclear shutdowns, and yen strength and weakness in global demand capped exports.

Standard & Poor’s has had Japan’s debt rating on a negative outlook since April after lowering it to AA- in January 2011.

Growth Projection

A downgrade is likely if medium-term growth falls from a current projection of 1.2 percent in real terms per capita, the ratings company said today. “We would also consider lowering the long- and short-term ratings if the government’s debt trajectory remains on its current course or begins to erode the nation’s external position,” it said.

The ruling Democratic Party of Japan has proposed raising the 5 percent consumption tax to 8 percent in April 2014 and 10 percent in October 2015 to help pay for soaring welfare costs as the population ages. Lawmakers opposing the increase have said it may hamper the recovery from last year’s disaster.

Even if the proposed increase in the consumption tax is implemented, structural problems like a “mismatch between the social security system and an aging population and current low macroeconomic growth” will remain in the Japanese economy, S&P said. Social-security expenses have more than doubled over the past two decades and will account for 52 percent of general spending in the year starting April, Finance Ministry data show.

“No matter how high the sales tax is raised, there’s no point unless the government does something with the social-welfare system,” S&P’s Ogawa said in an interview last month.

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