Moody's Changes Japan's Aa2 Rating Outlook To Negative From Stable

Tyler Durden's picture

Moody's Investors Service has today changed the outlook on the Government of Japan's Aa2 rating to negative from stable.

The rating action was prompted by heightened concern that economic and fiscal policies may not prove strong enough to achieve the government's deficit reduction target and contain the inexorable rise in debt, which already is well above levels in other advanced economies. Although a JGB funding crisis is unlikely in the near- to medium-term, pressures could build up over the longer term which should be taken into account in the rating, even at this high end of the scale.

More specifically, factors driving the decision are:

1. The severity and persistence of the shock that the global financial crisis imparted on Japan's government finances and on aggravating pre-existing deflationary pressures,

2. As a result, the current policy framework will not be capable of overcoming hurdles blocking a return to a path of fiscal deficit reduction,

3. Increasing uncertainty over the ability of the ruling and opposition parties to fashion an effective policy reform response to the debt and growth challenges, and

4. Vulnerability inherent in the long-time horizon of Japan's gradual fiscal consolidation strategy to worsening domestic demographic pressures, as well as to possible, renewed shocks in a fragile and uncertain, post-crisis global economic environment.

The rating action does not affect the Aaa foreign currency bond and bank deposit ceilings, the outlooks for which remain stable. Nor does the rating action affect the Aaa local currency bond and bank deposit ceilings. The ceilings act as a cap on ratings that can be assigned to the domestic or foreign currency obligations of other entities domiciled in the country.


The global financial crisis has had a deep effect on Japan's economy. It has significantly raised the hurdles which policy efforts must overcome to reach the government's 2020 balanced primary budget target (excluding interest expenditure). While Japan's real GDP growth of 3.9% in 2010 may prove to be the strongest among the major advanced economies, the apparent rebound was actually weaker in nominal terms.

Nominal GDP growth was a modest 1.8% on account of chronic deflationary pressures, which were aggravated by the global financial crisis. Over the long term through to 2020, the government does not envisage growth breaking out of the 1-2% real and nominal range in its baseline, "Prudent" scenario.

Moreover, even under the government's more optimistic "Growth Strategy" scenario, the envisaged rise in nominal GDP to 3.8% by 2020 will by itself not be strong enough to eliminate the primary budget deficit—thus the importance of policy reform. While a more buoyant global economy and a higher domestic labor force participation rate would boost growth under this scenario, new fiscal measures are unavoidably necessary to close the primary deficit.

To that end, the government intends to introduce a comprehensive tax reform program in June. However, the divided Diet -- in which the opposition Liberal Democratic Party controls the Upper House -- and the intensifying level of political challenges to Prime Minister Kan together threaten to bog down such efforts.

By contrast, we note that under that stable government of Prime Minister Koizumi from 2001-2006, confidence in the economy improved and policies gained traction. Were it not for the global financial crisis, the Koizumi target for a primary budget balance may have already been achieved.

While we do not see the government encountering a funding crisis in the near- to medium-term, we agree with Bank of Japan Governor Masaaki Shirakawa's view that "as history shows, no country can continue to run (large) fiscal deficits forever" (7 Feb 2011 speech, "Toward a Revitalization of Japan's Economy").

Large deficits and the collapse of growth since the early 1990s have led to an overhang of government debt that is by far the largest among the major advanced economies -- whether projected at 226% of GDP by the IMF, or at 174% of GDP by the Cabinet Office for 2010 (accounting practices explain the difference). Moreover, both sources project an inexorable rise in debt over the long term under current policy and growth assumptions.


Should the government of Japan put into place a comprehensive package of fiscal and supply-side economic reforms in June, we would monitor developments to assess their efficacy in stabilizing the government's credit fundamentals.

Japan's credit strengths lie mainly in its deep financial markets from which spring an exceptional home bias. The government can fund itself at a lower nominal cost than any other advanced economy. Moreover, throughout the global financial crisis, JGBs demonstrated sounder and more stable safe haven features than even US Treasuries, as the government relies on a domestic funding base buttressed by an ample stock of household savings equal to three times GDP and relatively moderate indebtedness.

Related to Japan's home bias is its strong external payments position which insulates the country from external shocks. In addition to a seemingly structural current account surplus on the balance of payments, its net international investment position, at 58% of GDP in 2009, was the largest of any industrialized advanced country — larger than Germany's 28% of GDP, while Aa-rated Spain and Italy had net liability positions. In fact, net income receipts from overseas assets provide a bigger contribution to the current account surplus than net merchandise trade.

Lastly, the strong external payments position is a reflection of the continuing competitiveness of Japan's large, export-oriented companies. Despite the recent appreciation of the yen, we see this sector continuing to support growth and the external position over the long term.


Japan's very large economy and very deep financial markets provide the wherewithal to absorb economic shocks. Nevertheless, the inexorable rise in government debt suggests that actions are urgently needed to regain a path of fiscal consolidation. Moreover, the government's large refinancing needs introduce susceptibility to financial tipping points, which could lead to abrupt, downward rating pressures. These may include:

1. An inability by the government to put into place its comprehensive tax reform program, or its adoption of weak measures that postpone action into the indefinite future.

2. A depletion of the domestic funding base to a level that is insufficient to meet government refinancing requirements. This could arise from a drop in the household savings rate into negative territory.

3. A shift in the current account on the external balance of payments into deficit. This would reflect a downshift in national savings and would raise government funding costs to a level on par with those in foreign government debt markets. It could also sharply raise the risk premium for JGBs.

On the upside, policies which help revitalize the economy and which lead to a clear and sustainable reduction in fiscal deficits would support the current Aa2 rating.

We expect the outlook horizon to extend over the next year or two, depending on developments.


The last rating action was on the Government of Japan on 18 May 2009, when Moody's unified Japan's public sector ratings at Aa2 with a stable outlook.

The principal methodology used in rating the government of Japan is "Moody's Sovereign Bond Methodology", which was published in September 2008.

Press releases of other ratings affected by this action will follow separately.

h/t Mark's Market Analysis

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asdasmos's picture

One more domino.

Max Hunter's picture

Looks like the JPY couldn't care less..  Further evidence that all these shitty fiats are going to go down together against PM's and commodities.. and... anything you can touch with your hands... Except houses..  Silver acting like a ball full of air 20' under water.

jeff montanye's picture

the line i took away from the post was about balancing the national budget by 2020, exclusive of interest payments.  i wanted to capitalize the last four words but am indoors and using that voice.

asdasmos's picture

Also, in case anyone is interested.

Inside Job download link:

More Critical Thinking Wanted's picture


aggravating pre-existing deflationary pressures

Just in case anyone was wondering why central banks try to avoid deflationary traps at any cost.

Deflation is definitely not fun. The Japanese-style "banks only QE" failed to reach the real economy:

And the deteriorating situation, amongst other things, resulted in all sorts of pain and suffering:


Vampyroteuthis infernalis's picture

Day late dollar short. Japan has been broke for years.

fx's picture

the REAL news is that Moody's continues to rate Japan AAA (domestic and foreign currency bond and bank deposit ceilings), taking comfort in, among other things, "the vast pool of domestic savings at about 3 times GDP". Never mind, that 2/3rd of these savings have already been spent by the govt (>200% debt-to-GDP) and that the aging population may soon massively tap what's left of those savings. The interest payments-to-govt revenue ratio is truly alarming and would rise above 1 the moment Japanese interest rates were to increase just by about 200 to 300 basis points.

But, not to worry, as soon as one week before the Japanese govt faces inescapable bankruptcy, Moody's will lose no time to alert you and downgrade the country to AA/Aa3.  

Overflow-admin's picture

Isn't that >1000% debt-to-GDP?

Concentrated power has always been the enemy of liberty.'s picture

hyperinflation this way comes.

NOTW777's picture

let the currency mayhem begin; yen in possible descending triangle with base at 119ish and aussie and neighbors weakening

Cash_is_Trash's picture

When does Moody's downgrade America?

Selah's picture


The day before the Dow hits 36,000.


10kby2k's picture

The day after all TBTF fail

dearth vader's picture

This ain't a stock market, it's a shock market.

NOTW777's picture

Moody’s has shined a glaring spotlight on America’s precarious financial condition. In the first three years of the Obama presidency, the US will end up borrowing $3.7 trillion. That is more than the US borrowed in the first 225 years of its existence. The debt the government owes borrowers will likely reach 64 percent of GDP. At this rate, we can foresee a time when the government will owe more than the sum total of the nation’s output.

Continue reading on Will Obamacare Shackle America's Economic Future? (Part 1)?Moody's Seems To Think So - National future trends |
Going Loco's picture

"And, of course, these structural risks are exacerbated by the continued presence of credit rating agencies that inspire false confidence with potentially catastrophic results by over-rating the sovereign debt of the largest countries. There is no reason to believe that the rating agencies will do a better job on sovereign risk than they have done on corporate or structured finance risks. My firm recently met with a Moody's sovereign risk team covering twenty countries in Asia and the Middle East. They have only four professionals covering the entire region. Moody's does not have a long-term quantitative model that incorporates changes in the population, incomes, expected tax rates, and so forth. They use a short-term outlook only 12-18 months – to analyze data to assess countries' abilities to finance themselves. Moody's makes five-year medium-term qualitative assessments for each country, but does not appear to do any long-term quantitative or critical work. Their main role, again, appears to be to tell everyone that things are fine, until a real crisis emerges at which point they will pile-on credit downgrades at the least opportune moment, making a difficult situation even more difficult for the authorities to manage."

Reptil's picture

Moody's and S&P are in the "USA Wall Street camp". There's a currency war being waged.
A very specific pattern, simular to this in Europe:
Rating agency downgrades -> yields on bonds rise -> overleveraged (who isn't?) banking system in danger -> politicians pressured/bribed -> IMF called in to take over control.

If there'd be a neutral rating, a lot of countries would be better off than the USA.
One difference though: US dollar = reserve currency

Itsalie's picture

Each time risk on trade seems to be running out of gas, S&P and Moody's would be summoned to beat up the risk-off currencies (aka JPY), and see how copper just miraculously U-turn :) 

Wynn's picture

when the smoke finally clears, the survivors will have one hell of a story to tell

Cash_is_Trash's picture

...and it will be forgotten after a few generations.

Just as the populace has forgotten of the Assignats, Weimar Germany, Zimbabwe, Argentina...


buzzsaw99's picture

In other news Moody's has been downgraded from "useless" to "irrelevant".

sabra1's picture

if you're in the moody, then i'm in the moody!

Buck Johnson's picture

Things are coming apart and they can't truly control it.  Black swans are popping up all across the globe.

silver_serf's picture

You mean...Things are coming apart because they control it

demsco's picture

Market closes green tomorrow because of snow or lack there of, depending. 

max2205's picture

Fade Moody's. Morons....

LostWages's picture

Nikkei down 2%.  Check if Laddel-Leed is selling.

StychoKiller's picture

When used schoolgirl panties are outlawed, only outlaws (and hopefully schoolgirls!) will have used panties! :>D

snowball777's picture

What is it that makes them such big, big freaks? Is it living on a densely populated island? All the mercury in the fish?!

buzzsaw99's picture

BTFD. that is all.

chump666's picture

now all we need is China paniking and selling UST's as a wave of inflation hits

AN0NYM0US's picture

forget Japan

Fitch downgrades Libya's rating


who would have thought that possible

mynhair's picture

Oh, BS, change everything but the US.

Bunch o'horseshit.

NFLX a conviction buy?  Fergot, they don't do buys.

Iceland did well today.

10kby2k's picture


I downgrade U.S. debt to>>>   DD

Cash_is_Trash's picture

With letter representing Bush Jr.'s report card.

Wolf in the Wilds's picture

Still wondering why US is AAA

Calmyourself's picture

If that is it don't tell the Japanese..  Once the Yen will not buy oil..  You know what happened last time their oil supply was threatened..'s picture

Japan's ownership of it's own debt is the problem.  It is the destruction of wealth in Japan that is ongoing.  First, stocks, then real estate and now Government bonds and bank deposits.  The banks own huge amounts of JGB's and three of the largest holders have turned to sellers.  The savings rate has declined from 16% to almost zero.  The demographics are bad and the retirees are withdrawing deposits because CD rates are .2 to .3%.  There is no chance to live off the earnings.  Japan has little time to correct their cash flow problem and rates would have to be above 3% to attract foreign buyers.  Government borrowing exceeds government revenue for the new budget year and they are already the most indebted country in the world.  They have lost their growth rate and they are trying to create inflation.  They cannot afford a rise in interest rates; inflation is not an answer.

10kby2k's picture


III would be better--insolvent idiot investors by triple i bonds usa

Aquiloaster's picture

"Only change endures." - Heraclitus


Did we really think that we were special (unique snowflakes, if you will)? That we could engineer the protracted bull market (the modern version of El Dorado) that was always sought? The moment a population loses sight that crashes, crises, wars, and migrations characterize the human career, that is the moment that reality imposes itself in a profound way and we remember that even regional systems, not to mention global ones,  are too large for complete administrative dominion.

born2bmild's picture

Japanese official calling for the doubling of sales tax to save them:

snowball777's picture

That'll do wonders for their black market and concomitant Yakuza arbitrage, but it won't help their debt issues.

disabledvet's picture

so size does matter after all.  in this case "the size of an obliglation" called a debt and with it "the need for higher interest rates to compensate."  when last we checked Moody's said "it's a question of free speech" when it came to this type of "morality check" which resulted for some reason in "interest rates plunging" and "raping the America taxpayer."  As Pink Floyd said "All in all it's just another brick in The Wall."  And no sooner do we say this than we see the teachers in Wisconsin scream "we don't need no education."  Alas, someone who understands the meaning by the lyrics as well.

StychoKiller's picture

What, no raging against thought-control, Wisconsin teachers?

"Some Lessons from the Underground History of American Education"
by John Taylor Gatto, found in "Everything You Know is Wrong",
ISBN 978-1-56731-637-7, pgs 274-287

Oop, temporarily forgot that that's what Modern USA Education is all about, never mind! <|:>(

PulauHantu29's picture

Kyle Bass February, 2011 newsletter to his investors is a must read. Japan is in terrible shape. The bubberment has spent all the savings of its peoples instead of running a deficit...until now. With nohting left to spend on saving their banks, they will prob start to deficit print faster.....a very bad situation....and Kyle Bass predicts a serious devaulation of the Yen from 83 now to maybe as bad as 130.