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The Three Reasons Why Moody's Just Downgraded Japan From Aa3 To A1
Less than two weeks ago we were delighted to remind S&P that about a year ago, the laughable rating agency which is now terrified of being sued any time it tells the truth, promised it would downgrade Japan the moment things for the insolvent nation turn up to be, well, just as they are with the Bank of Japan now monetizing every yen of Japanese debt issuance. And yet, so far S&P has been very quiet on the downgrade front, most likely because it still has its hands full on the litigation front with the DOJ (and Tim Geithner) for downgrading the US back in 2011. So overnight we were not exactly surprised when that "other" rating agency, Moody's, shocked the world and headline scanning algos when it downgraded Japan by 1 notch from Aa3 to A1.
Here are the reasons why Moody's just did what it did, just two weeks ahead of the all-important for Abenomics snap election, in which should support for Abe tumble, then all bets on Abenomics, and the global stock market reflation game, are off.
The key drivers for the downgrade are the following:
- Heightened uncertainty over the achievability of fiscal deficit reduction goals;
- Uncertainty over the timing and effectiveness of growth enhancing policy measures, against a background of deflationary pressures; and
- In consequence, increased risk of rising JGB yields and reduced debt affordability over the medium term.
The full Moody's report below (link)
The A1 rating reflects the government's significant credit strengths, including a large, diverse economy with a strong external position, very high institutional strength and a very strong domestic funding base.
The stable outlook reflects the broad balance between upside risks including significant fiscal consolidation and a resumption of economic growth, and downside risks including intensification of deflationary pressures and loss in economic momentum.
The rating action does not affect Japan's Aaa foreign currency, local currency country and bank deposit ceilings. Those ceilings act as a cap on ratings that can be assigned to the obligations of other entities domiciled in the country.
RATIONALE FOR DOWNGRADE
DRIVER 1: HEIGHTENED UNCERTAINTY OVER REACHING FISCAL TARGETS AND CONTAINING DEBT
The first driver for the downgrade of the Japan government's debt rating to A1 is the rising uncertainty over whether the government's medium-term deficit reduction goal is achievable, and whether policy makers can overcome the tensions inherent in promoting growth while simultaneously stabilizing and reversing the rising debt trajectory.
The Bank of Japan remains committed to monetary expansion, with some positive impact on core CPI inflation. However, while monetary expansion has boosted domestic aggregate demand to some extent, the consumption tax increase on April 1 2014 has exerted even more powerful downward pressure. At least in the short term, deficit reduction is undermining the growth revitalization objective of Prime Minister Shinzo Abe's economic policy strategy.
The government's response, to announce a delay in the second step in the consumption tax increase, appears to represent a shift in policy towards stemming re-emerging deflationary pressures on economic growth and away from near-term fiscal deficit reduction. This strategy could have merits. In our view, the government's target of halving the primary deficit balance, excluding budgetary interest payments, by fiscal 2015 from its fiscal 2010 level will be difficult to achieve without more robust nominal GDP growth and hence improved buoyancy in tax revenues. In their absence, reaching the long-term target of a primary balance surplus by 2020 will be even more challenging.
However, the strategy also poses risks to fiscal consolidation and, over the longer-term, to debt affordability and sustainability. Japan's deficits and debt remain very high, and fiscal consolidation will become increasingly difficult to achieve as time passes given rising government spending, particularly for social programs associated with a rapidly ageing population.
The government acknowledges that additional but as yet unidentified economic and fiscal reforms will be needed for Japan to achieve its primary balance target in the second half of this decade. But the postponement of the second stage of the increase in the consumption tax has resulted in the delay of the 2015 budget, and a concrete plan to meet fiscal targets is not likely to emerge until the second half of 2015. The trajectory of government debt, projected at 245% of GDP in 2014 according to the IMF, will only start to decline under the most favorable combination of economic and fiscal reforms, including tax and social security system reforms and total factor productivity improvements, an end to deflation and achievement of annual nominal GDP growth of more than 3.5%. Given current domestic circumstances and lackluster external demand for Japan's exports, achieving these conditions will be challenging.
DRIVER 2: ECONOMIC GROWTH POLICY UNCERTAINTIES AND CHALLENGES IN ENDING DEFLATION
The second driver for the downgrade is the rising uncertainty over the government's ability to enhance medium term growth through structural economic reform -- the third 'arrow' of Abenomics -- success in which will be crucial to achieve fiscal consolidation. While some indicators suggest a pick-up in economic activity over the past year, potential economic growth remains low.
GDP growth sharply contracted in the second quarter of this year following the introduction on 1 April of the first step of the consumption tax increase, to 8% from 5%. Output was also affected by adverse weather in the summer to some extent. And both real and nominal GDP contracted again in the third quarter of the year, putting Japan's economy in recession for the third time since global financial crisis.
Moreover the relapse of the GDP deflator, the broadest measure of price movements, into negative territory in the third quarter of this year highlights the difficult nature of ending more than a decade of deflation. Although the ratcheting up by the Bank of Japan of its quantitative easing policies in October may once again move the deflator back onto positive ground in the fourth quarter of 2014, the task ahead for economic revitalization and price reflation is looking more challenging than envisaged by Prime Minister Abe when he introduced his three-arrow economic policy package in March 2013.
Looking further ahead, the most notable structural reform measure to be implemented to date is a reduction in corporate taxation beginning in fiscal 2015. The details have yet to be announced, and the implications for business investment are therefore still unclear. It is not yet clear what further measures the government will choose, or be able, to take to address the deep-rooted structural problems of Japan's economy, including broadening labor force participation, enhancing corporate governance and dealing with the challenges posed by demographic trends.
DRIVER 3: EROSION OF POLICY EFFECTIVENESS AND CREDIBILITY COULD UNDERMINE DEBT AFFORDABILITY
The third driver for the downgrade is the potential implications of the first two drivers for the affordability and sustainability of Japan's huge debt load. Debt sustainability will rest on the continued willingness of domestic investors to provide funding at affordable rates for the government. This looks likely to remain the case as long as investor confidence is not undermined. The JGB market has been characterized by low and stable interest rates despite the exceptional rise in debt since the 1990s. And JGB interest rates have remained low and stable through a number of crisis episodes, including Japan's 1997-1998 financial crisis, the 2008 global financial crisis and the 2011 tsunami and Fukushima nuclear power plant disaster.
Nonetheless, the Bank of Japan's efforts to raise inflation to 2% may eventually put pressure on government bond yields and thereby raise government borrowing costs. Rising interest rates would increase expenditure and offset gains from revenue buoyancy. Rising uncertainty regarding the government's capacity to deliver on its policy objectives could raise yields without any commensurate rise in revenues. Either outcome would further undermine the government's ability to meet its fiscal deficit targets and reduce its debt burden over the medium term, and eventually start to undermine debt sustainability.
RATIONALE FOR A1 RATING AND STABLE OUTLOOK
JAPAN'S CREDIT STRENGTHS SUPPORTED BY A DEEP DOMESTIC BOND MARKET, STRONG INSTITUTIONS, LOW VULNERABILITY TO EXTERNAL SHOCKS
Whatever the challenges facing the government, Japan retains very significant credit strengths. Its A1 rating and stable outlook are supported by its large, diverse economy, which we characterize as having 'High' economic strength. And even with the very significant debt burden, we believe that Japan exhibits only 'Low' susceptibility to event risk. A marked home bias on the part of resident investors provides a strong funding base —domestic investors retain a marked preference for government bonds, which has allowed fiscal deficits to be funded at the lowest nominal rates globally over the past two decades. Private sector fiscal surpluses remain more than adequate to fund government deficits, without the government resorting to external funding. We believe that very high institutional and structural strengths, including a decisive and powerful central bank, currently sustain this funding advantage and are very unlikely to diminish over the rating horizon.
Although Japan's government gross financing requirements are far larger than other advanced country governments', contingent risks which could elevate further such financing needs are low and remote. Japan's banking and corporate sectors have restored their health in recent years in terms of capitalization and deleveraging. Household debt is at a moderate level and has remained stable over the past decade. And despite low economic growth, Japan's labor market is relatively sound in regard to key features, such as low unemployment level, the recent pick-up in employment and nominal wages and a labor force participation rate broadly comparable with other advanced economies.
Related to Japan's home bias is its strong external payments position, which reflects the accumulated system-wide savings. At more than 60% of GDP in 2013, Japan's net international investment position is much larger than any advanced industrial G-20 economy, insulating its economy and capital market from global shocks. Income earned from Japan's sizable external assets has helped to sustain the current account surpluses, although this has diminished owing to a shift into a trade deficit which is in large part driven by the demand for energy imports following the shutdown in the nuclear power industry after the 2011 tsunami and Fukushima nuclear power plant disaster.
WHAT COULD MOVE THE RATING DOWN / UP
While the stable outlook indicates that we believe the rating is well positioned for the next twelve to eighteen months, factors that could prompt a negative rating action include significant divergence from the path toward achieving fiscal targets; an intensification of deflationary pressures; a severe loss in economic momentum; or a shift in the external current account surplus into persistent deficit.
Moody's would consider a positive rating action if Japan were to implement policies that we concluded were likely to restore economic momentum and improve prospects for significant fiscal consolidation and debt reduction.
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Moody matters why????
What do you suppose NPR thinks?
Containing debt???
Bwahahahahahahaha
who knew moody's had a sense of humour?
You bring the A1, I'll bring the steak.
I only use A1 when they cook my steak over well done.....so yes. Ok
IOW, printing money like fevered dervishes in a vain attempt to create wealth out of nothing. Like turning straw into gold.
WTF is wrong with people?
Yeah, we know the reasons but since when have reasons mattered? What is the reason behind Moodys deciding to let reasons govern their ratings decisions?
Is this what caused the reversal in PM's. I said that the Swiss Gold Initiative only mattered if the vote was a yes, and thought I would have to eat my words last night. But people don't buy gold and silver because they think some tiny western central bank is going to buy gold. They buy it because the debt in all western economies and particularly government debt is too high and the only way to rectify those imbalances is through a default or inflate it away. In either condition the debt which comprises over 60% of financial assets will be cut dramatically in value. What will replace these, believed to be "safe" assets? My vote is on gold and silver and if their share of the financial asset market place increases from 1% to a significant portion of the pie that debt currently fills, the gains will be amazing. It appears as if I was right if the failure of the gold referendum was more than outweighed by the downgrade of Japan.
That is all.
NPR would say that it's not a sprint to the bottom it's a marathon.
A Charity Marathon, where everyone wins...
They don't, and all those ratings agencies are full of shit anyway. It's obvious to anyone but people with PhDs in economics that there is no hope for them to grow their way out of it. Even a 25% increase in interest rates(which would still be WELL BELOW historical norms), and it's game over for them. So either Moody's and the rest of them are stupid, or dishonest, or both. Either way. About the only way this could possible matter is a 'canary in the coal mine' scenario, as in maybe it is getting really mad if Moody's is actually downgrading
It's called being paid for by the companies you're providing the ratings on. The only honest one is Egan Jones and look how it got lambasted for rating properly.
DavidC
Warren must be shorting Japan and needs his personal destroyers in Moody's to spook it up a notch.
"Rising interest rates would increase expenditure and offset gains from revenue buoyancy."
No, it would blow the island off the map
That sounds more reasonable. No way would a ratings agency resort to financial analysis to downgrade someone. There has to be a crony angle somewhere. The eCONomic analysis clap-trap is just to distract the little people so they don't see the real mechanisms at work.
"I'm going to change my tyre because it is flat."
"Sure, but that doesn't explain why you drove around with a flat tyre for 20 years and finally decided to change it TODAY. The rims haven't worn down to the axle yet, are you sure you don't want to just keep on driving?"
Duplicate
Samurai Delicatessen, Samurai Laundry, Samurai Rating Agency
A1 Sauce makes anything go down better.
Samurai Taylor, Samurai sword, Samurai steak.
Shin Tzu - The Art of Moar.
Saw one of these, while searching for Seppuku / Harakiri Images over the web.
Do you have one of Mr. Abe doing the deed?
4. GODZIRRA!!!
GOJIRA!!1
[ But don't worry Japan, we'll still stealth Aaa++++ your shitty debt ;) ]
cuz the japaneese areloading up on gold hand over fist thats why
Dammit.....all that QE....down the tubes man.
Yes, Yes.. Japan downgraded :D Tell us again hows Putin regime Ruble crashed today.. or should I say this hour as it happens by hours... it's now 53.60 RUB for USD
Putin wanted to play nuclear war games with his economic might, the problem is, he has great military might and a tiny economic might.
viedoklis_Latvian S.S.R., please provide quality propaganda. Not worthless drivel that reads like a guy who participated to a game and is now whining because he is on the losing side.
Check out their gov debt-to-GDP ratio! Highest in the world, with estimates ranging between 200-300%.
We shouldn't rate countries by debt to GDP. They should be rated by debt to tax revenue. When you ask the bank for a loan, do they ask you about your GDP or do they ask what your income is?
But that metric would scare investors away and make economists and gov officials quite uneasy. Better dilute it with a larger denominator - GDP.
"But I was promised!"
And promises were meant to be broken.
Hope and change....did you really think that was going to happen?
Really?
I guess low oil prices can't help them (japan)..nothing makes much sense except lie and liars lie, preception of reality must be maintained.
Sale on electronics...Isle 5.
Seriously Japan's economy is a fucken Joke
what a show
If wages in Japan are stagnant, how is increasing inflation going to help wage earners afford a better stream of good and services? It won’t. Ultimately, what we need to see are policies which maintain wages for median and lower-income wage earners with the greatest marginal propensity to spend. Without this, in a demographically challenged and indebted private sector, so-called secular stagnation is almost a certainty.
http://www.dailymail.co.uk/news/article-2853983/US-CEOs-threaten-pull-ta...
"CEOs representing over 200 major American companies threatening to pull their support of Obamacare after legal problems arise with 'wellness' programs"
What they really mean is 'Come on buddy, this isn't how fascism works'.
Just to be clear, no CEO has ever supported Obamacare. They tolerate it because it does not excessively interfere with their businesses.
However, if Obama starts interfering with their businesses in an intolerable way then Obama will lose... and quickly.
Interestingly I was just reading an analysis which points out that Moodys have gor their timing wrong yet again!
So just as Japan sees something which might help it Moodys downgrade it!
The Japanese government, like the US government seems to be doing its best to completely wreck any vestiges of their economy.
Moody's is hilarious. They complain both about deflation and excess debt which cannot be repaid. The Keynesian solution to deflation is more debt. The more debt that is created, the more that can never be repaid. All debt can never be repaid because it is created with interest and because if there was no debt then there would be no money.
What would Moody's have Japan do? Create more debt to try to stop deflation and pay back old debt ... but then that is just more debt that must be repaid (or not).
Maybe Japan should create debt-free money to pay back debt. Maybe the governments of the world should get up off their backs and agree not to pay homage to Mammon, the banks and Moody's.
I wonder if Abe would have done it if Krugman hadn't been visiting Japan.
DavidC
I just downgraded Japan to FBAB
Fucked beyond all belief
Have things gotten serious yet ???
The oligarch's have not woken from there slumber so, I would say no.
Gee Abe, going to be taking any more limo rides with Krudman?
Wait a minute. Wasn’t it revealed Abe is buying all the Japanese debt??
Japan shouldn’t have ANY rating.
Everything is a lie.
Japan does not have millions of free riders sucking it dry.
I understand that the cost of taking care of an older population that is no longer working is taking its toll.
I'm just worried about what's gonna happen to all the EBT babies......I suppose we have some time left....but it probably wouldn't hurt to give it some thought.
It sucks getting old, if you can avoid it, I suggest you do so.
True, but It does have millions of retired workers 100% dependent on pensions.
Pensions which are 100% invested in the market now that bonds are a 0 sum gain/loss.
Millions of people not working, living off those who are.
With the CBs of the world making up the differance.
Each day, We pray the fantasy continues.
.
The yen has worked lower again sits near its recent lows. While the RSI is very low my experience has been this can go on for a long time and if panic sets in it will be followed by shock and awe. In the coming months the falling value of both the yen and euro may reek havoc through contagion. For months the major world currencies had traded in a narrow range allowing people to think we were on sound footing as central banks across the world continued to print and pump out money looking for growth that always appears to be just around the corner.
Recently several major currencies made multi-year highs or lows depending on the match-up. Because of weak demand for goods most of this freshly printed money has flowed into intangible investments Inflation has not been a major problem, but the seeds for its future growth have been planted everywhere. John Maynard Keynes said By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known. Weakness in the value of the Yen, Pound, and Euro must not go unnoticed. More on why this may be a signal that currency trading is about to get very wild in the article below. Please note, this may also be sending a signal that the whole system is unstable and the stock market could drop like a stone due to contagion.
http://brucewilds.blogspot.com/2014/09/caution-alert-currencies-may-get-wild.html
A1's a farking joke anyway. Moody's dunno shit until the house is burnt down. Trust them and you will have your arse handed to you.
This just goes exponential now...to the moon...the Yen is toast....I would hate to be retired there...they will never keep up with the inflation...
This just goes exponential now...
Dammit......please tell me not now.
Hey, you can't stop a calendar.
What took them so long to downgrade?
Why didn't they go still lower than they did?
It doenst matter, the BOJ is buying all the debt anyway... When they print money to buy debt you effectively set the interest rate to 0% anyway..
Eventually the BOJ and ABE will reach their inflation target to the ^xxxxxxxxxx
From Aa3 to A1?????? A "terd" rating would have been more appropriate.
Kamikazeconomy?
More pressure on Japan to join that damned TPP is who I see it. Also interesting that USA economy is ca-ca yet no USA rating agency dares to lower USA rating.
Lucky for JPN, their people hold most of their Bonds.
Lower than CHN, KOR, TWN (both KOR and TWN are suppliers to JPN), FRA(higher Debt to GDP), and the rest of all the Western European Countries? Please.
JPN should start buying T-Bills instead of Note and Bonds for starters, stop entertaining Moody's Credit Analysts' Interview Requests (one of my old friends used to be one), and establish their OWN - just like how CHN is doing.