Standard & Poor’s reported that it had lowered its long-term sovereign credit ratings on Japan to ‘AA-‘ from ‘AA’. At the same time, S&P affirmed the ‘A-1+’short-term sovereign credit ratings. The outlook on the long-term rating is stable.

“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,” S&P says.

The severe sovereign debt problems in Greece, Ireland, and Portugal cannot spread around the world to Japan. The Japanese economy is too large and too strong. It is the world’s third largest by GDP, recently passed by China. The troubled countries in Europe have junk ratings, or nearly so.

Global capital market investors may see a big difference between the trouble in Ireland and Japan despite the relative size of each economy. Institutions and countries which buy sovereign paper have begun to look at the world as a whole. Japan’s AA- rating may become the A+ level that Portugal has within a year or two. There does not seem to be any solution to the Japanese debt problem other than strict austerity. A number of global institutions like the World Bank have warned that austerity and tax increases will put nations on the road back to recession as levies curtail business and consumer spending.

S&P and Moody’s have already voiced their concerns about US sovereign paper because of very modest GDP growth and a sharp increase in deficits. The CBO has predicted the American deficit at $1.48 trillion for this year. It cites lack of economic improvement and unemployment as the major reasons. Both of these are intractable and may be so for several more years.

The concern about sovereign debt among the developed nations rises by the month. Most analysts put the time horizon for real trouble in the US as being five years or more away. But, America has run out of solutions, at least based on the political realities about entitlement programs. So, the US is likely to follow Japan along the downgrade road.

Douglas A. McIntyre

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