S&P Downgrades Japan From AA To AA-, Outlook Stable

Tyler Durden's picture

From S&P

  • Standard & Poor's expects Japan's fiscal deficits to remain high in the next few years, which will further reduce the government's already weak fiscal flexibility.
  • We have lowered Japan's long-term sovereign credit ratings to 'AA-' from 'AA'. We affirmed the short-term ratings at 'A-1+'.
  • The outlook on the long-term rating is stable, reflecting our view that Japan's strong external balance sheet and monetary flexibility partially offset the pressures stemming from the fiscal side.

Rating Action

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


The downgrade reflects our appraisal that Japan's government debt ratios--already among the highest for rated sovereigns--will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s. Specifically, we expect general government fiscal deficits to fall only modestly from an estimated 9.1% of GDP in fiscal 2010 (ending March 31, 2011) to 8.0% in fiscal 2013. In the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation program is implemented beforehand.

Japan's debt dynamics are further depressed by persistent deflation. Falling prices have matched Japan's growth in aggregate output since 1992, meaning the size of the economy is unchanged in nominal terms. In addition, Japan's
fast-aging population challenges both its fiscal and economic outlooks. The nation's total social security related expenses now make up 31% of the government's fiscal 2011 budget, and this ratio will rise absent reforms beyond those enacted in 2004. An aging and shrinking labor force contributes to our modest medium-term growth estimate of around 1%.

In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics, in part due to the coalition having lost its majority in the upper house of
parliament last summer. We think there is a low chance that the government's announced 2011 reviews of the nation's social security and consumption tax systems will lead to material improvements to the intertemporal solvency of
the state. We even see a risk that the Diet might not approve budget-related bills for fiscal 2011, including government financing authorization. Thus, notwithstanding the still strong domestic demand for government debt and corresponding low real interest rates, we expect Japan's fiscal flexibility to diminish.

That said, the sovereign ratings on Japan are supported at the lower '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 254% 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 corporate plus 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 is sound, following several years of restructuring and private sector deleveraging. Standard & Poor's assigns the Japanese banking system a '2' on its Banking Industry Country Risk Assessment (BICRA) scale, which ranges from '1' for the strongest to '10' for the weakest.  

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 stable outlook on our ratings on Japan balance weak public finances and anemic growth prospects with its strong external position and the flexibility afforded by the yen's international role. Should the government be able to consolidate its finances and to enact measures to improve its growth prospects--as it did in the early part of the last decade--upward pressure on the ratings would build.  Conversely, if we again mark down our fiscal forecasts, downward pressure on the ratings could reemerge.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
user2011's picture

Then should we expect US dollar get downgraded also ?

BlackSea's picture

Yed, but the US's turn is last. 2012-2013.

More Critical Thinking Wanted's picture


Watch out for such news:

Japan's debt dynamics are further depressed by persistent deflation.

As the sign of trouble ahead in the US as well - not rising inflation which is so fashionable in ZH reporting.

Rising inflation is usually a sign of expected growth - and an overrun of inflation is a lot easier to handle policy-wise: no developed economy has managed to hit hyperinflation in the last 80 years and believe me, it's not due to lack of honest effort! :-)

It takes an authoritarian dictatorship, debt denominated in some other country's currency and utter, sheer, mad incompetence for years to push an economy into hyperinflation, like it happened in Zimbabwe.

Disinflation or outright deflation like the one we can see in Japan is a sign of trouble ahead.

Deflation can hide like an iceberg and hit even a once growing and well-run country like Japan by stealth, and the damage can stay with it for a decade or longer. Once it's there it stays and strengthens and hits a new generation of people who can not possibly be blamed for the situation: youth unemployment and the suicide rate increased dramatically and has hit historic highs in Japan. Deflation is not a fun thing to experience, unless you've hoarded up your retirement in the boom years already (at the expense of generations to come ...).

The funny thing is the "solution" advocated by right-wing types: going back to the "gold standard" would hard-code deflation and real-term contraction pretty much.

The ruling elite, those who can introduce the gold standard and those who can hoard the gold and once hoarded never give out much of it anymore will of course be well taken care of in their country clubs, suffering recessions and depressions, all the whole the rest of the country engages in self-punishment, unemployment and other measures of austerity :-)

Those who advocate 'sound money' and 'austerity' the most are the ones who are experiencing the least of its negative effects. That pretty much tells us how compassionate and empathetic these ronpaulians are.


eigenvalue's picture

Why do you think deflation is bad? With deflation, you can buy more things and savers are encouraged to save. What the Japanese government has been doing in the past 20 years is to keep the price artificially at the hight levels of the bubble years. Go to Tokyo and see for yourself. Is there anything cheap there? With a sagging economy and exorbitant high prices, young people are sure to be squeezed.

More Critical Thinking Wanted's picture

Well, the unemployment/suicide-rate correlation graph of Japan's "lost decade" is worth a thousand words:


More background:


Suicide in Japan has become a significant problem nationally.[1][2]suicide include unemployment (due to the economic recession in the 1990s), depression, and social pressures. Suicide is predominately the result of a combination of factors such as healthcare provision, social attitudes, cultural influences and economic distress.[3] In 2007, the National Police Agency revised the categorization of motives for suicide into a division of 50 reasons with up to three reasons listed for each suicide.[4] Suicides traced to losing jobs surged 65.3 percent while those attributed to hardships in life increased 34.3 percent. Depression remained at the top of the list for the third year in a row, rising 7.1 percent from the previous year.[4]

I think only those politicians should be allowed to preach "austerity", "sound money" and social hardship in general who are willing to experience it first hand.

$1 CEO pay with billions in stock options does not count as hardship.

TheGreatPonzi's picture

You are really retarded.

Suicide has never been caused by economic conditions, only access to sex and love. And our feminist/retarded society has a lot to do with it.

More Critical Thinking Wanted's picture

Suicide has never been caused by economic conditions

Ok, I don't think your statement needs any specific refutation, I just quoted it to let it stand out in its sheer grotesque idiocy.

If your position is the state of the art of the right-wing intellect then we are indeed doomed as a species - the gene pool has been diluted way too much.


More Critical Thinking Wanted's picture


With a sagging economy and exorbitant high prices, young people are sure to be squeezed.

Prices in modern economies are predominantly coupled to demand, not to supply.

Just perform this quick thought experiment: what is easier today or was easier in the past 50 years, to sell a product or to buy it? Furthermore, if you bought an item could you have bought 10 more?

If your answer is: 'selling is much harder' and 'I could have been sold 10 more' then almost by definition it's a buyer's market, i.e. it is demand is that is dominating and demand is what is setting the biggest portion of prices.

And guess what happens to "exorbitant high prices" if few are able to pay for those items? Right, they are coming down. [*]

And yes, I realize that this short description is in stark contrast to the supply-side, neoclassical or even austrian monetarist dogma preached here on ZH. Sorry about that and welcome to the real world of keynesian economics, which actually works in practice :-)

[*] With the exception of monopolistic prices, which are more resilient to the lack of demand. How the libertarian and neo-GOP "get rid of anti-trust laws and let the big fish eat the small fish freely!" teachings are supposed to solve that particular problem of large companies cornering markets is a mystery though :-)


eigenvalue's picture

Prices in modern economies are predominantly coupled to demand, not to supply.

What do you mean by "Modern Economy"? The economy under the Great Keynesian Experiment?

Nowadays it is a buyer's market. But a possible explanation is that the salary level in the US is still at their 1970s level. People's desires are insatiable. That's the basic foundation of economics, which I think you agree. Everybody wants to consume more but he doesn't have the money. Keynesianism often says "inflation is good, deflation is bad". But inflation rewards those who borrow money and build production capacity (mainly rich people) and punishes those who save (mainly ordinary citizens). Of course, the market has become a buyer's market because people have beomce relatively poorer.

And guess what happens to "exorbitant high prices" if few are able to pay for those items? Right, they are coming down. 

How do you explain the stagflation in the 1970s. Fewer people could afford the prices than before but the prices were still high.

More Critical Thinking Wanted's picture

By "modern economies" I mean pretty much every country that has a more or less free market, where, given enough starting capital you can start producing whatever non-harmful product you wish to produce.

Nowadays it is a buyer's market. But a possible explanation is that the salary level in the US is still at their 1970s level.

Buyer's market is not something that needs explanation in itself really: it's a state of affairs, it's a fact, and a lot of things follow from it, regardless of how a buyer's market came about.

It is meaningful to ask how it got to be a buyer's market and why it remains a buyer's market.

How do you explain the stagflation in the 1970s. Fewer people could afford the prices than before but the prices were still high.

Stagflation of the 1970s was very likely caused by too much demand (i.e. a botched up monetary and fiscal policy trying to satiate those voters unhappy with the whole Vietnam War thing ...) coupled with a very juicy external price shock caused by exploding oil prices at the end of the decade.

Today's situation is markedly different: all data shows that businesses are suffering from lack of demand and are ranking "lack of sales" as the #1 problem. US production output is still low at about 70% of already-built capacity. Neither is a sign of overly strong demand! :-)

The reason for this was the financial crisis caused by the deleverage shock, which due to too weak policy response produced high unemployment which is very hard to get down.

Meanwhile other portions of the world have quickly (and very effectively) stimulated their economies out of the recession (China, Germany), and their demand is driving up resource prices speculatively and in real terms as well.

That does not help the US either, which, contrary to the dishonest right-wing propaganda of 'big stimulus spending', has imlemented about half as big a stimulus as Germany has done (on GDP proportional terms) and about a quarter of China's stimulus ...

Guess which economies are growing and which economy is having trouble?


Mark McGoldrick's picture

Your posts are the most perfectly accurate on this forum. 

Oh regional Indian's picture

Just wait till japan becomes a fully belligerent waritime nation, unlike it's present iron fist in a velvet glove avaatar.

Nations with active armies tend to get into serious deficit spending mode pretty quickly.

Plus, interest rates are at a hair trigger, especially if the industrial slow-down continues.

The carry trade is yet to unwind for real. Long term outlook stable. hardly!



papaswamp's picture

Do they mention demographics? Is this subject taboo or something? Japan will never recover unless they radically change their demographics (immigration laws).

eigenvalue's picture

I think one of the causes which led to Japan's horrible demographics is that the Japanese created a housing bubble from mid 1970s to 1990. That directly increased the living costs in big cities, which caused young people to postpone marriage and produce fewer children. Methinks the US is heading in the same direction, which will also be disastrous...

A Man without Qualities's picture

Yes, this is a crucial aspect.  Add to that the thousands of young who have simply given up on the world...





4ndy's picture

There's always Detroit as backup.

Racer's picture

And did you notice how neatly the futures bounced back after that?

TheGreatPonzi's picture

Stocks are not driven by value, they're driven by money. And the more the news are bad, the more the cheap money flows. That's why DOW 14,000 will be a reality soon.

Stop watching equities and watch commodity prices, because that's where the show is playing.

Ferg .'s picture

And yet officials at the finance ministry thought it prudent to purchase 20% of the bonds issued at the EFSF auction . Unbelievable .

Racer's picture

Trichet says they are credible in the delivery of price stability over the next 10 years..... like ZimBen and his 100% certainty.

Wow these people must be clairvoyants!

sudzee's picture


LBMA looks to be getting desperate. Da boys are makin 250mm a day shorting gold from 4am to 8:30 then another whackload going long comex 8:30 to 2pm comex. Doin it every day so don't even have to shift around that tungston. The last 3 months were real good but a couple of hundred million a day just isn't enough nowdays. Inflation ya know.

A Man without Qualities's picture

they're shorting gold in London and buying gold in New York... interesting implications...

sudzee's picture

8:30 ramp on gold. Hudathought?

HelluvaEngineer's picture

Another 20 years and they'll have all these issues sorted out.  I think this is a pretty obvious BTFD.

Josephine29's picture

Yes this subject is intriguing as if you look at downgrading Japan it is hard to ignore the other elephant in the room which is of course the US fiscal deficit. However Japn has plenty of problems of her own.

Also the markets for now are more hopeful for Japan.

Also there is the situation of her government bond yields which at a closing level of 1.24% this morning for her ten-year maturity represent an incredibly low-level if you look at the comparable ones from the US of 3.43%, the UK 3.69% and even Germany 3.19%.

But as then pointed out.

Firstly if you are bearish on Japan’s long-term position then there may be plenty of money to be made should this yield adjust accordingly!



EB's picture

S&P just saved Shirakawa about 10 billion Yen.  Should be a good day for ETFs. 

Note the liquidity in the CHF cross.

mmlevine's picture

I fear that when I finally wake up and accept the fact that I have to BTFD, no one else will.  That is how my luck has rolled in the stock market for at least 15 years.  I am a terrible trader - to emotionally involved and married to the idea that the world economy is screwed many times over and the S&P is 80% overvalued. 


Ferg .'s picture

Big jump in USD/JPY but the 83.00 - 83.50 area has been a warzone lately . Offers keep flooding in everytime it crosses the 83.00 handle .

gookempucky's picture

Thanks for the late nighters EB--overlay looks coordinated.

In other news more riots only Yemen now. AP


Sudden Debt's picture




DavidC's picture

It's only taken S & P 20 years to downgrade Japan by a notch...


zaphod's picture

What is sad is Japan can get a AA- rating and borrow at 1%, but I can not get a AA- rating and can only borrow at 8%.

Which makes no sense because I have no debt, regular income that exceeds expenses and assets. None of these things are true for Japan so why are they AA-....

eigenvalue's picture


Maybe a bit off the topic. But I think I should put the following news here. I translated into English the following article on the gold shortage in China from the Caijing Magazine website. Hopefully it will be useful for all the ZH PM bugs.:)

An insider from China National Gold Group (the biggest gold producer in China) told the reporter during an interview on Jan 25, 2011 that the physical gold supply in China is extremely tight these days. The cause is said to be the strong domestic and foreign demand because of China’s Lunar New Year Holiday. He told the reporter that gold producers are reducing supply while demand from industrial users still keeps increasing.

“On the supply side, gold production is usually suspended during the time around the Lunar New Year. Gold producers use winter to perform the maintenance of equipment after they reach the annual production target. From the seasonal perspective, the current excessive snow and rain has caused great inconvenience to transportation (this sounds funny). Besides, on the demand side, the demand for physical gold is soaring:” the interviewee pointed out.

During the period around the Lunar New Year, monthly gold production of China National Gold Group is down to 0.2 tonne from a monthly average of 1.5-1.7 tonnes. However, the Group can produce as much as 2.5-2.6 tonnes during the peak season. The man further explained, “Besides a decrease of the gold production, increasing demand is the main cause of the current physical gold shortage. Every gold producer or industrial user must have a reasonable inventory (gold) level and cash balance to keep operating. However, this is not the case at the moment. Companies lend (gold) to each other but can’t pay back. Or there is no physical gold that can be bought or borrowed.”

“Another reflection of current tightness is as follows: from Dec 2010 to Jan 2011, the largest spread between the domestic spot gold and Au (T+D) on the Shanghai Gold Exchange was RMB 4 per gram (USD 0.6 per gram, USD 18 per oz). The spread had never been so large even during the time close to the Lunar New Year. Normally the spread should be below RMB 1 per gram (USD 0.15 per gram, USD 4.7 per oz).”

Au (T+D) is Shanghai Gold Exchange Gold Extended Contract. It reflects the trend of the domestic (Chinese) gold spot market and influences the spot gold price. ( Au (T+D) is very similar to gold futures. The biggest and perhaps only difference is that it does not have a specific delivery month. Delivery can take place every business day)

A gold trader from a large Chinese state-owned commercial bank said that the insufficient supply leads to the larger (than normal) spread. He mentioned globally, not simply in China, the supply is very tight. Under these circumstances, even if (Chinese) commercial banks buy gold from the overseas market, the domestic demand will still not be met in time.

The insider from China National Gold Group finally concluded that the current tightness will not affect the retail supply. This seasonal shortage is expected to end after the Lunar New Year. It happens in the past. However, with the ever-increasing demand for gold, “short-term” shortage of this kind will become more and more severe.



user2011's picture

Come to think of it, the timing for the downgrade is quite obvious.   The interests in US notes auction has been dwindling.   Euro and Yen has been gaining.   Korea, Australia, China, German had raise their interest rates.  The pressure is on US dollar.

Since Japan really wants Yen go down, why not downgrading Yen and pop up US dollar.   The object is to pop up the interest in the Treasury auction to lower the interest rates.   Along with helping Japan in exporting.

Wolf in the Wilds's picture

Hypocritical.  S&P, if impartial, should downgrade the US to same if not weaker level.