Moody’s Investors Service has cut the Japanese government’s debt rating owing to concerns over the country’s borrowing and deficit levels.
The credit ratings agency lowered the government’s rating from Aa2 to Aa3 and gave the country a stable outlook after concluding a review which started on May 31.
Japan, the world’s third largest economy, has the greatest government debt overhang of all major advanced countries.
The government claims its debt will be 181 per cent of GDP by the end of 2011, while the International Monetary Fund – using a broader accounting definition – places it at 233 per cent.
Neither expect this to ease significantly in the next decade, says Moody’s. “The rating downgrade is prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession,” the group says. “Several factors make it difficult for Japan to slow the growth of debt-to-GDP and thus drive this rating action.”
Moody’s says the “frequent changes” in government over the past five years, difficulty in translating long-term economic and fiscal strategies into “effective and durable” policies and weak growth prospects are some of these factors.
It adds that the March 11 earthquake and tsunami, along with the emergency at the Fukushima nuclear power plant, have hampered the country’s recovery from the 2009 recession and exacerbated its deflationary environment.
The government’s debt rating has been placed at stable in recognition of Japanese investors’ preference for government bonds, which allows the country to finance its debt at low rates, the agency says.
Moody’s also says a ratings upgrade could arise from evidence of a “robust and sustainable” recovery or progress in Japan achieving fiscal consolidation targets.
However, any delay in implementing comprehensive tax and social security reform, inability to recover from the earthquake or recession and an easing in the “home bias” of Japanese investors could lead to further downgrades.