TOKYO, Nov 26: Global risk evaluator Fitch cut Japan’s local and foreign currency debt ratings on Monday amid growing alarm over mounting debts and a crippling price slide in the world’s number two economy.

The London-based agency downgraded Japan’s long-term domestic and foreign currency ratings to AA from AA-plus and maintained a negative outlook, leaving Japan as the lowest-rated country apart from Italy in the Group of Seven (G7) richest nations.

“Japan’s credit fundamentals continue to deteriorate. The world recession has robbed the economy of its only bright spots in recent years, i.e., exports and hi-tech investment,” Fitch said in a statement.

“In doing so, it has uncovered a stagnant domestic economy, with the private sector still weighed down by balance sheet problems and a fragile financial system still suffering from deteriorating asset quality,” it said.

The ratings agency calculated Japan’s exploding debt at 140 per cent of gross domestic product (GDP), pushed up through repeated futile attempts to stimulate the economy through extra fiscal spending. Fitch warned the ratio would rise to over 150 per cent by the end of 2002.

“Meanwhile deflation is taking a firmer grip. Prices have been falling for three years now and with the output gap widening sharply, deflation is expected to intensify to around 2.5 per cent next year,” it warned.

As a result, Japan’s nominal GDP would be smaller in 2002 than in 1993, “underlining the severity of Japan’s ‘lost decade’.”

There are few monetary policy options left for the Bank of Japan to adopt, as interest rates hovering near zero, to help ease the pain and a structural reform plan advocated by Prime Minister Junichiro Koizumi has yet to bear fruit.

“But, a sharp weakening of the yen would help,” it said.

“The immediate future will be painful whatever policies are pursued and could be aggravated for a time by reform measures. But quickly proceeding with the full range of reforms will be crucial for the Japanese economy to return to sustainable growth,” it said.

Opposition from old school politicians in the ruling Liberal Democratic Party could frustrate the premier’s reform drive, Fitch warned.

“Continual denial over the severity of the economic problems facing Japan and persevering with a ‘muddling through’ approach will over time further erode creditworthiness and Japan’s sovereign ratings.”

Economy and Fiscal Policy Minister Heizo Takenaka was quick to react to the downgrade.

“I want to stress our stance that we are bringing Japan’s finances to a controllable situation in the medium and long-term.

“I don’t think trust in Japanese government bonds will decline by doing so.”—AFP