Ratings agencies’ warnings, actions on Japan debt
Fitch Ratings on Friday cut Japan’s outlook to negative from stable, warning of risks to its already tattered public finances from a massive earthquake and tsunami and the still unknown costs from the crisis at the crippled nuclear power plant in Fukushima.
Moody’s Investors Service and Standard & Poor’s have similarly cut their outlook on Japan’s credit ratings this year, potentially emboldening those in the government pushing for higher taxes, although deep rifts between the government and opposition still stand in the way of fiscal reform.
The following are comments and actions by ratings agencies on Japan:
Fitch Ratings
– Fitch on May 27 cut Japan’s outlook to negative from stable, warning that the cost of cleaning up the crisis-hit Fukushima nuclear plant could hurt its public finances while delays in restoring power supplies could lead to a downward revision of its 0.5% economic growth forecast for 2011.
– it said a downgrade could be triggered if Japan fails to strengthen its commitment to fiscal consolidation or if post-quake reconstruction creates substantial additional fiscal or economic costs, while the ratings could revert to a stable outlook with a stronger and more credible fiscal consolidation plan with credible political commitment to implementing it.
– Fitch estimated that reconstruction after the devastating March 11 quake and tsunami would add 2 percentage point of GDP to government expenditure over 2011 and 2012, although this would not be material for the ratings. its long-term local currency rating is now at AA-minus.
– Fitch said on March 16 that it did not view the economic impact of the disasters as severe enough to warrant negative rating action. Japan’s high-value-added and well-diversified economy, strong public institutions and sovereign financing flexibility supported the view that it could surmount the disaster without a dramatic negative impact on sovereign creditworthiness and ratings.
– In September 2009, shortly after the Democratic Party of Japan swept to power for the first time, Fitch kept Japan’s rating at AA minus with a stable outlook. it last cut the rating in November 2002.
Standard and Poor’s
– Standard and Poor’s on April 27th downgraded its outlook on Japan’s sovereign debt rating, warning that the huge cost of the devastating March 11 earthquake will hurt the country’s already weak public finances without tax hikes.
– S&P said in a statement that the March 11 earthquake, tsunami, and damage to Tokyo Electric Power co. Inc.’s Fukushima Daiichi nuclear power plant mean Japan’s fiscal deficit will exceed S&P’s previous forecast of 3.7% of gross domestic product to 2013.
– S&P lowered its outlook for Japan’s rating to negative from stable three months after it cut the rating for the first time in nine years by one notch to AA-minus, its fourth-highest rating and one level below Moody’s and Fitch’s ratings.
– S&P said in a statement on its downgrade on January 27 that the move reflected its view that Japan’s government debt ratio, or the ratio of debt to GDP, already among the highest for rated sovereign debt, will continue to rise.
– In January 2010, the agency cut the outlook for government debt to negative from stable, citing reduced wiggle room on fiscal policy and voicing disappointment with the government’s budget consolidation plans.
Moody’s
– Moody’s changed the outlook on Japan’s Aa2 sovereign rating to negative from stable on Feb. 22 due to heightened concern that economic and fiscal policies would fall short of the tax reform needed to achieve deficit reduction targets and curb a rise in debt.
– Moody’s said on March 21 that Japan’s economy could shrink after the earthquake and tsunami, but the government has the fiscal and credit means to deal with a disaster.
– In May 2009, Moody’s cut Japan’s foreign currency rating to Aa2 from AAA but raised the domestic debt rating to Aa2 from Aa3. the outlook in both cases is stable. Moody’s last lowered Japan’s local currency bond rating in May 2002.
– Moody’s said in May 2009 that it believed the domestic market would absorb the record level of bond issuance that year to fund the government’s economic stimulus plans. it said the rating reflected the risks of Japan’s high level of debt, which leaves the country’s fiscal position vulnerable to shocks or imbalances that could cause a sharp rise in interest rates.
– Moody’s said on January 30 that Japan’s credit strengths include high national income, savings and economic resilience, a broad and deep market for government debt, and a very strong external payments position. on the other hand, credit challenges for Japan stem from high government debt and fiscal consolidation, deflation and sustainability of economic growth, as well as demographic pressures due to a fast-ageing population.
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