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S&P Revises Japan Outlook To Negative On "Diminishing Economic Policy Flexibility," Still Rated AA
More rumblings of an actual (gasp) downgrade down the line? S&P's report on Japan:
Overview
- Japan's economic policy flexibility has diminished as a result of increased fiscal deficits and government debt, persistent deflation and a prospect of continued sluggish economic growth.
- We revised the outlook on the long-term rating to negative from stable.
- We affirmed our 'AA' long-term and 'A-1+' short-term sovereign credit ratings on Japan.
Rating Action
On Jan. 26, 2010, Standard & Poor's Ratings Services revised to negative from stable its outlook on the 'AA' long-term rating on Japan. At the same time, we affirmed our 'AA' long-term and 'A-1+' short-term local and foreign currency sovereign credit ratings on Japan.
Rationale
The outlook change reflects our view that the Japanese government's diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures. At a forecasted 100% of GDP at fiscal yearend March 31, 2010, Japan's net general government debt burden is among the highest for rated sovereigns. Moreover, the policies of the new Democratic Party of Japan (DPJ) government point to a slower pace of fiscal consolidation than we had previously expected. Combined with other social policies that are not likely to raise medium-term trend growth and with persistent deflationary pressures, we forecast that Japan's net general government debt to GDP will peak at 115% of GDP over the next several years.
The affirmation of the 'AA' sovereign ratings on Japan rests on the country's strong net external asset position, the yen's status as a reserve currency, the financial system's resiliency throughout the recent global recession, and the economy's diversification. We believe that these strengths will keep the government's rating in the 'AA' category, even if further fiscal deterioration leads to a one notch downgrade.
A strong net external asset position and the yen's key international currency position provide ample external liquidity and good access to global capital markets. Japan is the world's largest net external creditor in absolute terms with projected net assets of an estimated 309% of current account receipts at the end of 2009. The country's current gold and foreign exchange reserves of over US$1 trillion are second only to China's. Standard & Poor's expects Japan's net external assets to rise further in the coming years due to continued current account surpluses.
The global financial crisis affected Japan's financial system less than its counterparts in the U.S. and Europe. Compared with its equity base, Japan's financial system had relatively little exposure to troubled asset classes of structured finance and Japan's private sector is nearing the end of a decade-long process of deleveraging. The liquidity support policies of the Bank of Japan have assisted the country's financial system in facing the instabilities in global capital and financial markets.
However, the following factors suggest mounting pressure on Japan's credit quality:
- Large fiscal deficits and outstanding debt. Stimulus measures to deal with the sharp decline in external and domestic demand will lift fiscal deficits to 10% of GDP in fiscal 2010 (ending March 31, 2011), and the government may extend the target of attaining a primary surplus well beyond a decade. Our forecast that net general government debt to GDP will peak at around 115% of GDP over the next several years assumes that Japan's recession is not protracted.
- Policy shifts by the new government, elected in August 2009, appear to place greater emphasis on redistribution of wealth, in part reflecting coalition dynamics. As a result, although there is still a commitment by the government to public sector reform, we do not see a comprehensive plan to boost growth potential and hence government revenues in the medium term. That said, we do not believe that the broad thrust of macroeconomic management that has characterized Japan for half a century will change.
- More than a decade of deflation. This has slowed economic activity by hurting the business environment and domestic consumption.
- Aging population. Japan's fast-aging population challenges the government's inter-temporal fiscal position and depresses its economy's growth prospects. The nation's total social security related expenses now make up 30% of the fiscal 2010 budget. Although the country successfully reduced some of its long-term liabilities from its defined-benefit pension fund system in 2004 (by extending the period before benefits are paid, increasing members' contributions, and reducing the amount of payouts), more comprehensive reforms are necessary to ensure the system's long-term sustainability.
Outlook
The ratings on Japan could fall by one notch if economic data remain weak and measures to boost medium-term growth are not forthcoming, given the country's high government debt burden and its weak demographic profile. Standard & Poor's will be looking for signs of government policy toward fiscal consolidation in the update of its medium-term fiscal plan, due to be released in the first half of 2010. Additional policy initiatives may also be revealed after the upper house elections in July. If on the other hand we conclude that government policies, either on the fiscal side or structural reform side, will moderate the government's debt trajectory, the ratings could stabilize at the current levels.
Ratings List
Outlook Revised
To From
Japan
Foreign currency AA/Negative/A-1+ AA/Stable/A-1+
Local currency AA/Negative/A-1+ AA/Stable/A-1+
Ratings Affirmed
Japan
Foreign Currency AA/A-1+
Local currency AA/A-1+
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These ratings suffer from political correctness syndrome of "everyone is a winner". How these rating agencies have any relevance in the markets is beyond me.
My thoughts exactly. If Japan is still rated that high, the US will never get downgraded. The rating is useless anyway because all it tells you is you will get paid back in nominal terms.
I agree. They will revise their ratings after the fact. They will never give true ratings for fear of upsetting the markets.
"A man with his hands in pockets feels foolish, but a man with holes in pockets feels nuts."
Kind of reads like they could be talking about the US instead of Japan. Large fiscal deficits and outstanding debt, policy shifts by the new government appear to place greater emphasis on redistribution of wealth, aging population.
+1
I was thinking the same exact thing as I read this.
If this is how they set their ratings, what is the difference between EM debt and debt in the US, UK & Japan ? No wonder some pension funds have been filing into EM debt which atleast has very good yields even though the ratings are poor (who cares about ratings anyways ? haha)
Does anyone find the UK rating to be a sort of "soft racism?" I'm certainly not suggesting that S&P or Moody's are in any way downgrading non-Anglo nations because they are non-Anglo, but it seems aweful strange that in the midst of terrible financials and a massive debtload, that the UK maintains AAA. I understand the US case... funding currency, largest economy, Chinese support, etc... But what is the justification for the UK, which does not have these special attributes, to maintain the rating. As far as I can see, other than that "special relationship," between the US/Britian politically/economically/ethnically, there is no reason why the UK should be a AAA.
check it out my good man
http://www.treas.gov/tic/mfh.txt
if your ratings agencys downgrade
her majesties finacial "wizzards"
we can no longer afford to buy any more
"yankee dollah"
$140 billion purchase in the last 12 months
is not to be sniffed at old boy
Running out of ponzi ninja moves.
The rating agencies are really one of the keystones of the global ponzi scheme.
They are granted "licenses" by the government to rate companies, and governments. Can they realistically ever downgrade their masters? Or the holders of large amounts of their masters debt?
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