TOKYO, Nov 28: Global risk evaluator Standard and Poor’s cut Japan’s long-term sovereign rating on Wednesday, citing a failure by Tokyo to implement reforms amid ballooning national debt and a crippled banking system.
The US agency downgraded Japan’s long-term local and foreign currency sovereign credit ratings to AA from AA-plus and said the outlook remained negative. It affirmed the short-term local and foreign-currency sovereign ratings at A1-plus.
Analysts described the cut as conservative. “The impact will be significant only when and if the rating falls another two notches to single A status,” said HSBC senior economist Peter Morgan.
Prime Minister Junichiro Koizumi’s slow progress in implementing structural reforms triggered the downgrade, S and P said in a statement.
“Standard and Poor’s expects further significant weakening of both the Japanese economy and the government’s fiscal position before more radical action is taken,” it said.
But a government source challenged S and P’s argument.
“The Koizumi cabinet has been carrying out reforms swiftly so it’s inappropriate the rating was cut because of a delay in reforms,” the source said, declining to be named.
The financial sector — stricken with a mountain of bad loans — was also highlighted as a key area of concern.
“Japan’s banking sector will likely require additional direct government capital injections of up to three per cent of GDP to remain solvent,” the agency said, putting 10 major banks and two trust banks on review for a possible downgrade.
Even with additional capital, the banks would remain unwilling to increase lending amid the deep economic slump, it warned. “As such, monetary policy will remain ineffective and prospects for growth will remain poor.”
The New York-based agency said government debt would jump to 175 per cent of GDP by 2005 from around 130 per cent now and warned a second supplementary budget expected to be passed by parliament early next year would push the government budget deficit to 8.3 per cent of GDP.
Deficits at this level were unsustainable, it added.
The political system which gives disproportionate power to the agricultural, construction and retail sectors was an obstacle to change.
“The natural conservative nature of bureaucracy also mitigates against reform.”
Japan’s credit rating is now the lowest of the Group of Seven (G7) richest nations, alongside Italy. It also brings S and P in line with rival ratings agency Moody’s, which cut Japanese long term sovereign debt to AA2 last year and Fitch, which downgraded Japan to AA earlier this week.
All eyes are now focused on whether Moody’s downgrades Japanese government bonds to single A status, analysts said.
Any sharp downgrade of bonds would cause a “mad panic”, said UBS Warburg senior credit analyst Graeme Knowd.
“Moody’s might go down to AA-minus, but it would be difficult to justify an A,” he added.
Dynamics in Japan are very troubling, said Nikko Salomon Smith Barney chief economist Jeffrey Young.
“Rating agencies will not look more favourably at Japan until there are credible prospects of a return of growth,” he said.
The world’s number two economy shrank 0.7 per cent in the three months to June and most economic figures indicate a further contraction occurred in the September quarter, which would push Japan back into a technical recession.
GDP data for the third quarter are due out on December 7.—AFP