First US, Now Japan: S&P Revises Japan Credit AA- Outlook To Negative

Tyler Durden's picture

S&P revises Japan's AA- credit rating outlook to negative. The culprit: the Japan earthquake that just as predicted, has become the scapegoat to excuse another quarter of "non-recurring" EPS misses. And while according to Wall Street the economic devastation is GDP positive, Japan may soon be a single A credit, which of course will send it 10 year bond trading with a 0 yield handle.


  • Standard & Poor's expects costs related to the March 11, 2011, earthquake, tsunami, and nuclear power plant disaster will increase Japan's fiscal deficits above prior estimates by a cumulative 3.7% of GDP through 2013.
  • We revised the outlook on the long-term rating on Japan to negative to reflect the potential for a downgrade if fiscal deterioration materially exceeds these estimates in the absence of greater fiscal consolidation.
  • We affirmed our long- and short-term sovereign credit ratings on Japan at 'AA-' and 'A-1+', respectively.

Rating Action

On April 27, 2011, Standard & Poor's Ratings Services revised to negative from  stable its outlook on the long-term ratings on Japan. At the same time,  Standard & Poor's affirmed its long- and short-term sovereign credit ratings  on Japan at 'AA-' and 'A-1+', respectively. The transfer and convertibility
(T&C) assessment remains 'AAA'.


In our Jan. 27, 2011, announcement lowering the long-term rating on Japan to  'AA-', we noted that if we were to mark down our fiscal forecasts, downward pressure on the ratings could reemerge. The March 11, 2011, earthquake, tsunami, and attendant damage to Tokyo Electric Power Co. Inc.'s (TEPCO; BBB+/Watch Neg/A-2) Fukushima No. 1 nuclear power plant cause us to make such a markdown to our forecasts. As long as there are no revenue-enhancing measures such as tax increases, we currently project that reconstruction costs could range from ¥20 trillion to ¥50 trillion, with ¥30 trillion being our central forecast. If there are no revenue enhancing measures such as tax increases, we expect the central and local governments to bear most of this cost, adding 2% of GDP to our forecast for this year's general government deficit and 1% to our forecast for next year's, with deficits remaining above 8% of GDP through 2014, compared with 8.0% in 2013 in our previous forecast (see table below). Overall, we expect Japan's fiscal deficits to increase above our prior estimates by a cumulative 3.7% of GDP through 2013. Although we do not expect the disasters to materially hurt the country's medium-term growth potential--and we do not expect the government's real effective interest rate to rise significantly--we see net general government debt to GDP reaching 145% of GDP in fiscal 2013 (ending March 31, 2014), compared with our previous forecast of 137% of GDP.

In light of the evolving developments at the TEPCO nuclear power plant, in particular, we regard these projections as uncertain. Much will depend on Japan's political leadership and its ability to forge a political consensus on how to offset fiscal measures in the future. The extent of environmental contamination in northeastern Japan remains unknown.  Although we expect no lasting damage to Japan's supply chains, some manufacturers could decide to move a greater share of production offshore. Combined with the headwinds of intermittent deflation and a fast-aging population, Japan will be challenged to raise its real GDP growth potential much above 1% annually over the medium term, in our view.

That said, Japan's sovereign ratings are supported at the 'AA-' level by the country's ample net external asset position, relatively strong financial system, and diversified economy. In addition, the yen is a key international reserve currency.

Japan is the world's largest net external creditor in absolute terms, with projected net assets of an estimated 322% of current account receipts at yearend 2010. The country's current gold and foreign exchange reserves of over US$1 trillion are second only to China's. In addition, both the financial sector and the combined corporate and household sectors are external creditors. Standard & Poor's expects continued current account surpluses to further enhance Japan's net external asset position in the coming years.

In our judgment, Japan's financial system appears sound, following several years of restructuring and private sector deleveraging. Despite the damage by the tsunami, we do not expect a major rise in credit losses in the banking system on a whole, although there are some local financial institutions that
we expect may need government support.

The denomination of 2% of declared international reserves in yen as of the end of September 2010 illustrates the yen's reserve currency status. In addition, 17% of daily global foreign exchange transactions are denominated in yen as of April 2010, and Japan's deep domestic capital markets, combined with its open
capital account, permit the use of the yen as a global financing vehicle.


The negative outlook signals that a downgrade is possible if Japan's public finances weaken further over the next two years in the absence of fiscal consolidation to offset them. We believe that uncertainty over the country's fiscal and economic outlook will lessen over the next six to 24 months.  If the government's debt trajectory remains on its current course or begins to erode the nation's external position, the long- and short-term ratings could be lowered. If reconstruction costs place less burden on public finances than we expect–either because of lower outlays or increased revenues to cover them–and the government makes progress in strengthening Japan's fiscal profile, we could revise the outlook back to stable. 

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Silver Bug's picture

Well once again, this is obviously the correct thing to do. Actually the correct thing to do would be to just downgrade both credit ratings, as obviously they arn't much higher than junk bonds.  It does make you wonder what is going on behind the scenes, and wonder why the S&P would be committing suicide. Something fishy here.

downwiththebanks's picture

I downgrade S&P to junk status.

"Hey fuckers, how about all the money you defrauded from pension funds with your stupid fucking AAA ratings on paper feces?"

You belong in JAIL.  Stop sucking off the banker-gangsters.

Yen Cross's picture

Thanks Tyler and crew! Excellent work! Lets discuss the long term debt Japan has. Lets discuss Korea and China, (and another lost decade) Lets discuss a homogeneous society that is ageing rapidly! Lets discuss the fraud in Kampo! LETS GET TRANSPARENT!

Sudden Debt's picture

Still enough to apply for a visa or mastercard.




andybev01's picture

Well; maybe a secured one.

Id fight Gandhi's picture

And the market ignores it. Fun times. Anyone see the yields on the piigs today. 2 yr Greek is worse than a shitty credit card rate, and they keep saying all is well. Anyone wanna guess when they crumble?

slaughterer's picture

These S&P downgrades are a blatant bid to regain credibility after the mistakes made with sub-prime AAA credit ratings.  S&P should up their corporate security forces a la BACs black helicopters and SWAT teams if they want to play it straight with the major industrial nations and not collude anymore.  Honesty has its risks in the well-armed ponzi world.

slewie the pi-rat's picture

feta cheese crumbles.

greek 2-years have their own barber shop!

the japanese situ will be less uncertain in the future.

in the long run, we'll all glow in the dark, but the supply chain, strap-on of the huge, enormously corpulent, teetering, tottering nanny state, can be expected to deliver a veritable fistfull of reflation to a battered ass near y-o-u.


mmlevine's picture

Coffee out the nose!  Too funny.

Hephasteus's picture

The new cesium 137 atoms that I have recently added to my biological distinctiveness says true dat!!!

I'm gonna go eat some yogurt and pick up a bit more strontium 90. Yummy.

Broomer's picture

All the eyes are on the FOMC press conference.

Who cares about the Chinese, they all look the same.


Popo's picture

Great.  S&P now recognizes what the entire rest of the world has recognized for some time.  

I'm really glad that the big corrupt institution that's in the pocket of the mega-banks has managed to stutter out a smidgeon of truth.   

It's the little things, I guess...

Josephine29's picture

I was reading about Japan's economic policy yesterday and the blog post I read pointed this out a day ahead of Standard and Poors move.

The Japanese government has not helped much either. I am not discussing her reconstruction programme as plainly one is necessary I am discussing the fantasy being peddled that Japan can do this without issuing any more government debt! The first plan is for her to spend an extra 4 trillion Yen which is around US $49 billion and yet this heavily in debt country feels that it can do so without borrowing anymore but so far without taxing anymore too! Indeed taxing  a weak economy may also not be an especially cunning plan either. So again we see the consequences of past failures and as the government did badly in the elections which took place over Easter Japan lacks clear leadership right now.

primaryschooldropout's picture

have ant one of you noticed the german state to gdp ratio's? or france?(province) guess what they are insolvent as well. you have to tax the rent out of the system for it t work.

slewie the pi-rat's picture

i yam speechless, yet thinking of food. 

slackrabbit's picture

excellant - now we can all show off our glowsticks in the dark


max2205's picture

S&P cuts are the new buy signal. Please go out of business

Dr. Impossible's picture

 NEWS BEFORE ITS NEWS!!!.....copy and pasted from a "to be written & released"  rating agencies file.....these are mere excerpts of a more whole release coming soon.

With Japans recent high energy discovery, they have single handedly reduced/removed the need for light-bulbs everywhere...a global it lights out over the heads of the financial engineers in the US!

... As Japans patented trade secrets seem to remain currently intact. The world awhole, would never doubt an ability to repay debt. The simple solution Japan has found from the historical U.S.Empirical/financial advancement technologies, sending state delegates (living or passed) to regions in doubt. Allowing an abundance of cheap energy for community heating, and lighting.

 Mainland Japan now has a greater power source then the famed...U.S. printing press technologies of year passed.

Matxeu's picture

Cheaper than an intervention.....