Moody’s cuts Japan rating, blames politics

TOKYO: Moody's Investors Service cut its rating on Japan's government debt by one notch to Aa3 yesterday, blaming a buildup of debt since the 2009 global recession and revolving-door political leadership that has hampered effective economic strategies.

Japan is preparing to elect its sixth leader in five years to replace unpopular Prime Minister Naoto Kan, under fire for his handling of the response to a March tsunami and subsequent radiation crisis at a crippled nuclear power plant.

The downgrade, while not out of the blue, served as another reminder of the debt burdens that nearly all of the world's major advanced economies shoulder, even as policymakers struggle to agree on ways to stimulate sub-par growth without massive new spending.

The United States lost its top-tier AAA rating from Standard & Poor's earlier this month, and Moody's warned in June that it might downgrade Italy as Europe's sovereign debt crisis festers.

Moody's new rating on Japan's debt is three notches below coveted AAA status, which Tokyo lost in 1998, but is still classified as high grade. Japan is now the same level as China, which surpassed it last year to become the world's second-largest economy, and one notch below Italy and Spain.

“Over the past five years, frequent changes in (Japan's) administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies,” Moody's said.

Moody's had warned in May that it might downgrade Japan's Aa2 rating due to heightened concerns about faltering growth prospects and a weak policy response to rein in bulging public debt, already twice the size of its US$5 trillion economy.

Finance Minister Yoshihiko Noda, a fiscal conservative who has joined the race to succeed Kan, refrained from direct comment on Moody's downgrade. But he said: “Recent JGB (Japan government bond) auctions have met favourable demand and I don't see any change in market confidence in JGBs.”

Analysts said the downgrade was hardly a surprise and the reaction in financial markets was muted.

“I had expected that the rating cut would have taken place after the election for the leadership of the (ruling) Democratic Party of Japan. But looking at the candidates, there seems to be nobody among them who would seriously tackle financial reform, so that's why Moody's went ahead and cut the rating,” said Yuuki Sakurai, CEO and president of Fukoku Capital Management Inc.

The risks of an upgrade and a downgrade are equally balanced but it would take a significant development to get the ratings agency to move in either direction, Tom Byrne, Moody's senior vice-president and regional credit officer, told reporters.

An earlier agreement to raise taxes to cover welfare costs was a good start at fiscal consolidation, but the best chance for success is a stable government, Byrne added.

Japan's next leader has a mountain of challenges ahead, from battling a soaring yen and forging a postnuclear crisis energy policy to rebuilding from the tsunami and reining in public debt, while paying for reconstruction and the bulging costs of an ageing society.

The March disasters knocked the economy back into recession, and the strength of an expected rebound later this year is being clouded by weak domestic and global demand and recent gains in the yen, which threaten export competitiveness.

Moody's said Japan needed to achieve 3% nominal growth in its gross domestic product to get the deficit under control and that a government plan to double the 5% sales tax by mid-decades was not bold enough.

“That's not enough. The government knows that as well,” Byrne said. - Reuters