Moody's Places Japan Aa2 Rating On Downgrade Review, Notes Possibility Of JGB Funding Crisis

Tyler Durden's picture

Singapore, May 31, 2011 -- Moody's Investors Service has today placed the Government of Japan's Aa2 local and foreign currency bond ratings on review for possible downgrade.

The review has been prompted by heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government's ability to fashion and achieve a credible deficit reduction target. Without an effective strategy, government debt will rise inexorably from a level which already is well above that of other advanced economies.

Although a JGB funding crisis is unlikely in the near- to medium-term, pressures could build up over the longer term, and which should be taken into account in the rating, even at this high end of the scale. Moreover, at some point in the future, a tipping point could be reached, and at which the market would price in a risk premium to government debt.

More specifically, factors driving the decision are:

1. The much larger than initially expected economic and fiscal costs of the March 11 earthquake are magnifying the adverse effects imparted by the global financial crisis from which Japan's economy has not completely recovered.

2. Concern that the policy framework will continue to fall short of achieving deficit reduction on a timely basis.

3. The vulnerability of a long-term 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, or 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 short-term rating is unaffected and remains unchanged at P-1.


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 GDP growth of 4% in 2010 may prove to be the strongest among the major advanced economies, the apparent rebound was actually much weaker in nominal terms, and faltered in the fourth quarter of 2010. The March 11 earthquake contributed to a 3.7% annualized contraction in real GDP in the first quarter of 2011, sending the economy into its third recession in a decade.

In addition, the fiscal consequences of the earthquake are proving much greater than initially expected. Preliminary indications are that the direct costs to the government's budget may amount to around 2% of GDP, not including costs that may arise from Tokyo Electric Power's liabilities from the devastated Fukushima Daiichi Nuclear Power Station. This would be twice as great as those of the 1995 Kobe earthquake.

These developments further hamper the ability of the economy to achieve a growth rate that is strong enough to help achieve a steady reduction in the budget deficit. 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 effective and timely 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, Japan's 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 continue to threaten to bog down such efforts.

While we do not see the government encountering a funding crisis in the near- to medium-term, no country can continue to run large fiscal deficits forever.

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.


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 and in the months after the March 11 earthquake, JGBs continued to demonstrate strong safe haven features because of a deep and dependable domestic funding base.

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 more than 50% was the largest of any industrialized advanced country — almost twice as large as Germany's, 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 the trade balance.

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 a susceptibility to a credit market tipping point, which could lead to an abrupt fall in JGB prices and a rise in yields, which would in turn result in downward rating pressures.

The focus of the rating review is twofold: (a) an assessment of the scope, effectiveness, and timeliness of the administration's proposed comprehensive tax reform program, and (b) the near- and long-term fiscal costs and economic consequences of the March 11 earthquake.

While we do not see immediate pressures from other risk factors, potential adverse developments in a number of areas would add downward pressures on the rating trajectory. These include:

1. A reduction in 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.

2. 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.

A fiscal and economic reform program which holds promise for stabilizing government finances and eventually deflecting downward the rise in the government debt trajectory would be consistent with a rating in the Aa range.

On the other hand, a weak or delayed reform program coupled with continued weak economic growth prospects would put greater downside pressure on the rating and reduce the probability that it could remain in the Aa range.


The last rating action on the Government of Japan was on 22 February 2011, when Moody's changed the outlook on Japan's government bond ratings to negative from stable.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008.

The Yen reacts accordingly:

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Yen Cross's picture

 Moodies ( Moodys) Ratings are pretty weak these days! Didn't AIG pass those ratings on PRE- 2008?

Dolemite's picture

Fade this last gasp in stocks and Euro

Gold going up

disabledvet's picture

natural impulse and by no means am i saying wrong.  i think the German's are doing the absolutely right thing on nukes however and absolutely the right thing on Greece.  Lincoln called it "necessity."  It ain't pretty--but they're not poor, either--and by bailing out Greece for basically the third time (if we include the verbal jibber/jabber as we should) Germany is showing the world "yes we are that rich."  Again:  "it's a Confidence Game."  Nothing like "show me the money" of course.  And of course that feller who said "you're gonna get killed if you buy that Greek debt" has now been proven as wrong as his (short) treasury call.  these are not new lessons of course "on either the up OR the downside."  and "stop calling me Shirley."

traderjoe's picture

They are rich because politicians use taxpayer money to bailout their banker friends and colleagues? Whatever.

CPL's picture

Moody's, other than the FED injection, would be dead as a stone.  Why they are reporting the dead of something two year after the fact is beyond anyone.


sigh...maybe it was the complete a total crop failure or someone didn't get a piece of tenticle rape porn.   Un-fucking-real.  i know more of the fuckers took their hiatus in the hamtons for the summer after this weekend.  My goal this summer is to play my HTF against thie badly designed HFT's with game theory.


I bet 10 million I can't get them all back before June 10th for fun and MY profit.  The mice walk away from their desk.  This cat is going to eat their everything, leveraged and all.  The Math is easy, to bad they paid someone for their degree.  Dumb blue blood bitches.


kiss kiss bang bang.

Problem Is's picture

"heightened concern that faltering economic growth prospects and a weak policy response..."

Then the US should be triple F...

Josh Randall's picture

Lets see...govt balance sheet is underwater like Jack Cousteau, nuclear meltdowns of historic proportion, lost revenue from exports from ipads to sushi, and a rapidly dying population....hmmmm - sure why not review for downgrade

jeff montanye's picture

the thing that stands out worldwide is the clamor particularly by the elites for austerity in our present time of famine, after devouring the corncrib during the prior three decades of (relative) prosperity. like neither the stag nor the flation was strong enough on its own.

CPL's picture

Shut up...I want them to play "stoic".  By the time they come back they'll be broke.  Can't play golf and try to trade.  The unpaid smart interns are gone, you know the well bred people that aren't blue blood twadlenanny's with close cousins.

Josh Randall's picture

Hey HPD - off topic - whats the symbology when you see financial wizard types or others speak or pose with their hand under their chin ? Is it denoting they are "free thinkers" like the famous statue ? I figured you would know if anyone - I'll hang up and listen now... 

Yen Cross's picture

 Don't quit FOX HPD. I'll ass slap you, if you do!     C- you do have listeners!   

FranSix's picture

A yen intervention.  Without printing money, just lots of gobbledygook.

No major changes just yet.

Anyone short Japanese bonds have got to wonder if shaking off chronically low interest rates  will ever happen.

traderjoe's picture

More importantly - when it does, will you get paid in the crack-up-boom and then will it be too late to buy hard assets?

RobotTrader's picture

Nikkei up 110, led by exporter and heavy manufacturing stocks...

I wonder if an asteriod were to hit Tokyo if it would even put a dent in their financial markets.

John Law Lives's picture

I wonder if an asteroid were to hit Robotomy's head if it would even kill one living brain cell (assuming there is one living brain cell inside that incredibly thick skull).

disabledvet's picture

hence the advantage of "having your brain in your pee pee."

Fish Gone Bad's picture

Talk about being late to the party!  Every day the country gets a little bit more contaminated.  Every day clouds of radioactive gas are being emitted from Fukushima.  Every day they do absolutely nothing other than wring their hands with worry, just waiting to die.  Japan has a mess that is growing like "The Blob".  What an absolute mess.  Yes, it needed to be downgraded.  It actually needs to be downgraded quite a bit more.

Ricky Roma's picture

Add a couple more handles to the ES/1.... 

disabledvet's picture

ooops!  of course "the next time you hear there's still deflation in Japan...

holdbuysell's picture

Am I the only one who looks at the S&P in amazement?

The ongoing downgrades of just about everything related to economics and sovereign nations continues.

It reminds me of Monty Python and the Holy Grail.

Limb loss after limb loss, no matter how bad it got, that knight was determined.


Ricky Roma's picture

LOL!  That shit is hilarious when he is just a stump!!!

StychoKiller's picture

"Come back, ya bloody coward, I'll bite your kneecaps off!" -- Black Knight

FreedomGuy's picture

Yes, the S&P is up nicely from it's lows, bonds are at record highs, PM's are at record is everything doing so well at once? The thing that seems odd is that demand for cash/money is at an historic high. Nearly every major country outside of China is demanding record amounts of money, USA, Greece, Portugal, Japan, etc. Yet, the price of money is at record lows?

To me, this is obvious manipulation. The problem becomes that you cannot invest without trying to guess what the government will do next, e.g., QE3, bail out Greece, restructure Irish debt, devalue currencies, etc.? The world is now a political economy. There is almost no point in doing bond ratings in my mind. Every point will have a counterpoint. All news makes the stock markets go up.

buzzsaw99's picture


Moody's is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets...

Useless as tits on a bull is more like it. the bernanke put means that everything is AAAAAAAAAAAAAAAA okay!

Ricky Roma's picture

Scene from Tommy Boy...

Tommy: Let's think about this for a sec, Ted. Why would somebody put a guarantee on a box? Hmmm, very interesting.
Ted Nelson, Customer: Go on, I'm listening.
Tommy: Here's the way I see it, Ted. Guy puts a fancy guarantee on a box 'cause he wants you to feel all warm and toasty inside.
Ted Nelson, Customer: Yeah, makes a man feel good.
Tommy: 'Course it does. Why shouldn't it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted?
[chuckles until he sees that Ted is not laughing]
Ted Nelson, Customer: [impatiently] What's your point?
Tommy: The point is, how do you know the fairy isn't a crazy glue sniffer? "Building model airplanes" says the little fairy; well, we're not buying it. He sneaks into your house once, that's all it takes. The next thing you know, there's money missing off the dresser, and your daughter's knocked up. I seen it a hundred times.
Ted Nelson, Customer: But why do they put a guarantee on the box?
Tommy: Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I got spare time. But for now, for your customer's sake, for your daughter's sake, ya might wanna think about buying a quality product from me.
Ted Nelson, Customer: [pause] Okay, I'll buy from you.
Tommy: Well, that's...
Tommy, Richard Hayden: ...What?

Dolemite's picture

Fade this last gasp in stocks and Euro

Gold going up

disabledvet's picture

Russia is raising interest rates "surprisingly."  And "i'm sorry for calling your wife a bloated warthog and i bid you good day!"

oogs66's picture

this does feel like a rally to fade.  it's not as strong as I would have expected given all the hype about how a deal has been reached

AUD's picture

It's OK, he's not called Masaaki 'Easy' Shirakawa for nothing.

Yen Cross's picture

  I love all of you intelligent people. I never Junked any of you! 

     Keep up the good work! YenCross.

chump666's picture

japan banks/ pension funds recycling liquidity into the stock market via the nutso BoJ and MoF.  Japan people get zero

A Man without Qualities's picture

It's all for the best, in the best of all possible post-capitalist worlds...

chump666's picture

Hey ZH hedge, see the supply disruption to japan car industry - WORST EVER!  Japan is in big trouble

Coldfire's picture

Apropos of the deep thinkers who architected Japan's current predicament (and the US's), a proposed collective noun for Keynesian economists: a plague. A plague of Keynesians.

PulauHantu29's picture

Devastating Deflationary Debt Downward Spiral with minimal real growth for the near future will lead to serious deflationary depression unless the BOJ can liquify the Japanese economy despite creating somewhat an inflation problem.

Comrade de Chaos's picture

(Reuters) - Goldman Sachs invested more than $1.3 billion from Libya's sovereign-wealth fund in currency bets and other trades in 2008 and the investment lost more than 98 percent of its value, the Wall Street Journal reported, citing internal Goldman documents.


Orly's picture

You mean someone pissed off The Squid?

That'll teach his ass.

Comrade de Chaos's picture

from the article:

'When the fund, controlled by Col. Muammar Gaddafi, made huge losses Goldman offered Libya the chance to become one of its biggest shareholders, the Journal said, citing people familiar with the matter.'

- now that - guaranteeing a client returns, depending on the nature of transaction or advice might be ILLEGAL, finra rules. Not 100% sure , there might be a qualified investor exemption, but i highly doubt it. sick.


Orly's picture

Oh, okay.  The Squid took Khaddafi's money and put it on USD longs and got smoked. To make up for it, they offered him the Warren Buffet special?

Did he take the bait, though?  And if he did, what are the chances he's going to get his five bill back?

Man, it never stops, does it?

Element's picture

Orly just wanted to say thanks for the comments you've been making lately.

It seems more and more people are quickly realizing there really is a hidden-hand mafia (and not so hidden any more) behind our puppets, and the MSM puppet makers.

We are in one of those rare times in history where their actions are patently obvious to anyone caring to look below MSM veneer and BS.

It's got to the point you have to wilfully close your eyes to it all and live in 'denial' in order to not see it anymore.

In fact, that is exactly what the people in my own country seem commited to doing ... for now. They will, like the USA,wake up much too late, to do anything but rebel and fail, and make a bigger mess.


The piggies are banking on it in fact.

Orly's picture

You're quite welcome.

Some of these ideas seem so absurd and outlandish that I can hardly believe them myself but when they fit into the puzzle so nicely, they cannot be ignored.

Most of the time, I think most people here just think I am crazy.  That is why I try to make the points as clear as possible.

Thanks to you for mentioning it because sometimes I feel foolish, even though I know I am right.  What we must do now is explain it to everyone who will listen.  Maybe we still have a fighting chance because once the thread starts to unravel, it will expose the fabric rather quickly.

Thanks again for your kind words.


A Man without Qualities's picture

Fuck me, that's impressive even by Investment banking standards.  The amount of money the banks have in essence screwed out of oil rich EM nations is staggering, through the standard trick of showing very complicated structures to a bunch of total novices, and telling them "everyone's doing this".  There is usually so much embedded optionality, often barrier options that lead to losing everything, it would take a highly experienced trader to properly assess the deal, but that was not the case here.

The irony is that people see no harm in screwing the Libyans, but they would do this to their own grandmothers (in fact the have already done so)

As for offering underpriced preference shares, this seems to suggest that they broke the law and that they were so confident of their trades, that they hadn't fully hedges, thereby creating a windfall gain that they used to subsidize the pref shares...


Still, all of this is consistent with what I hear about Goldman's trading operations - they have been taken over by psychopaths...

poydras's picture

"Notes Possibility Of JGB Funding Crisis"

Has Moody's considered Japan's NIIP and chronic trade surplus?

This is all too humorous for me...

medicalstudent's picture

silver will never stop


im serious.;


earth has problems. zerohedge cannot solve them. but must try.


only all of us, all at once. (adi da?  who the fuck is this he is right.)


Time heals.



downwiththebanks's picture

Did the political hacks at Moodys file this report from prison?  Because that's where they belong.  

Remind me why these institutions still exist ...


Urban Redneck's picture

The ratings agencies still exist because Ben and Timmay like the free blowjobs, and they remain an extremely useful policy tool of US government policy until the EU comes up with some equally corrupt ratings agencies of its own.


bill40's picture

Is it just me noticing a pattern here? ZH announces that it is difersivying from the dollar into x currency and Hey Presto!


Up pops a credit rating agency with a threat of or actual downgrade of x country.


Interesting times.