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Japan sovereign debt rating downgraded

Thursday 27 January 2011 - by Andrew Hickley

Standard & Poor's has downgraded Japan's sovereign debt rating for the first time in nine years, claiming that the government lacks a "coherent strategy" for fiscal consolidation.

Already the world's most indebted nation, the move from AA to AA- comes as S&P forecasts that Japan's debt ratios will continue to rise in the coming years beyond that previously envisioned, before peaking in the mid-2020s.

It also states that persistent deflation and the country's ageing population challenges "both its fiscal and economic outlooks".

"Specifically, we expect general government fiscal deficits to fall only modestly from an estimated 9.1 per cent of GDP in fiscal 2010 to 8.0 per cent in fiscal 2013," the report states.

"In the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation programme is implemented beforehand."


The report questions the ability of the Japanese coalition government to both adopt a strategy and have the political ability to force change through, suggesting that there is only a low chance that the government's announced 2011 reviews of social security and consumption tax systems will lead to material improvements.

"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."

Investment fund manager Invesco Global however brushed off the S&P report, claiming that the debt downgrade will have "no meaningful impact" on the outlook of the Japanese stock market.

Invesco Global account manager Julian Rea said: "The new minister for economic and fiscal policy, Kaoru Yosano, has underlined the need to address Japan's debt, and recognition in Japan of the need to raise the consumption tax seems to be increasing."

In reducing Japan's credit outlook to "stable", S&P did acknowledge that the country maintains a relatively strong financial system, a well diversified economy, and that the yen is a "key international reserve currency".


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