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Japan credit rating downgraded over ballooning deficit

Japan has the highest debt-to-GDP ratio of any country in the world, with its borrowings estimated to hit 233% of annual economic output in 2011

Credit ratings agency Moody’s criticised the instability at the top of Japanese politics on Tuesday as it slashed the country’s credit rating and warned that its mountain of debt needed to be tackled.

Moody’s cut Japan’s rating by one notch to Aa3, its fourth highest rating, and said a tougher deficit reduction plan was urgently needed. The move came just hours before Japan took fresh steps to help corporations cope with the strength of the yen, including a 0bn (£60bn) fund to help fund overseas acquisitions.

Japan has the highest debt-to-GDP ratio of any country in the world, with its borrowings estimated to hit 233% of annual economic output in 2011. Moody’s said the rapid turnover of Japanese prime ministers – five different men have held the job since the credit crunch began in August 2007 – had prevented the government from turning “long-term economic and fiscal strategies into effective and durable policies”.

Naoto Kan, the current prime minister, is expected to resign next week, triggering yet another leadership battle – and potentially dealing another blow to Japan’s debt-reduction plans.

“A divided Diet [the Japanese parliament] and tensions within the ruling Democratic party of Japan risk both the timing and implementation of the reform plan. Indeed, the imminent change in the party’s presidency and the election of a new prime minister reflect the factious nature of the country’s politics,” Moody’s warned.

Kan had proposed a fiscal consolidation plan this year, after March’s devastating earthquake added to the country’s economic problems. This included doubling the sales tax later this decade. Moody’s argues that more needs to be done to achieve a primary budget surplus by 2020.

Otherwise, it said, “even under the government’s more vigorous and optimistic economic growth scenario, a decline in the debt-burden trajectory would remain elusive”.

The downgrade did not alarm traders as most of Japan’s debt is bought by domestic investors, meaning it is less reliant on the international credit markets. The Nikkei 225 closed 1.07% lower at 8639.61.

Moody’s told reporters in Tokyo that it did not see the eurozone debt crisis spreading to Japan, and maintained a “stable” outlook on the country’s debt.

Recent twists in the financial crisis have driven up the value of the yen to record levels, hurting Japanese exporters. Finance minister Yoshihiko Noda pledged to take “decisive action” to prevent speculators pushing the yen higher, as he announced that 0bn of credit will be made available to countries to help them borrow cheaply and invest overseas. Noda also stepped up the monitoring of foreign exchange positions held by currency dealers.

“We decided to compile the package to show our strong determination that we will act if current yen rises persist, or if the yen rises further,” Noda said.

The package received a lacklustre reception in the financial markets, though, where there was disappointment that Japan had not intervened in the foreign exchange markets to actively push its currency lower, as it did three weeks ago. The yen rose slightly, hitting ¥76.53 to the dollar. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds