Accusing the Japanese Government of lacking a “coherent strategy” to deal with its mounting sovereign debt, S&P today cut Japan’s rating for the first time since 2002.
The latest move shows the rating agency’s concern over the long term financial prospects of the world’s third largest economy.
Although Japanese government bond yield remains low compared to international standards, indicating that there is no immediate prospect of a default, the gross national debt is set to cross 200 percent of the GDP, triggering panic among some about the state’s ability to keep them under control.
The Japanese Finance Minister Yoshihiko Noda refused to comment on S&P’s latest move, but said it’s important to maintain consumer confidence.
When asked about his reaction, Prime Minister Mr. Naoto Kan said: “I just came out from parliament and wasn’t aware, so please ask me about it later”, reported Reuters.
“To maintain the market’s trust, it is important to … send the message that fiscal discipline will be maintained”, said Mr. Noda.
The Prime Minister’s “commitment to fiscal reform had not been fully understood”, said Kaoru Yosano – the country’s Economy and Fiscal Policy Minister and termed S&P’s latest move “regrettable”.
However, Junichi Ujie – Chairman of Nomura Holdings sees a silver lining in S&P’s latest move. He thinks it may push the government to the path of fiscal reforms. “It will make it easier for (Economy Minister) Yosano to push through laws on fiscal reform”, said Mr. Ujie.
“Foreign investors might short-sell but they don’t hold very much – only around five per cent, I don’t expect a turmoil in the bond market” said Mr. Ujie.
The cost of insuring a sovereign default widened by 4 points to 84 basis points – but still well short of the record 120 points seen before. However, the downgrade created fresh concern in Europe and spread over Credit Default Swaps (CDS) widened for Belgian and Italian sovereign debts.
“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”, said S&P in a statement.