Fitch Cuts Japan To “A+”

Credit rating agency, Fitch Ratings, cut Japan’s sovereign ratings to “A+”, and posted its outlook as “negative.” It is one in a long line of downgrades in the ratings of large developed nations. The announcement not only undermines faith in a rapid economic recovery in the old order which used to include the US, Europe, and Japan. Japan may not be effected much, at least in its ability to raise money on preferential terms. As the economic and financial situation in the EU worsens, there are limited investment options for global capital markets investors. This has kept US Treasuries yields at all-time lows, despite a cut it it AAA rating by S&P last August. Fitch wrote about the Asian nation:

Japan’s gross general government debt is projected to hit 239% of GDP by end-2012, by far the highest for any Fitch-rated sovereign. This debt ratio would also have risen 61pp since the global financial crisis. This compares with a median of 39pp for OECD economies and 8pp for ‘A’ range sovereigns. Japan is less of an outlier when account is taken of its large pile of sovereign financial assets (worth about 80% of GDP on Fitch’s calculations), but net indebtedness is still rising strongly.

Japan’s Fiscal Management Strategy envisages declines in the government debt/GDP ratio only from FY21. Fitch regards this as a slow pace of consolidation given the scale of Japan’s debt. Moreover, Japan’s consolidation strategy is subject to political risk. The government’s key revenue-raising plan is to hike the consumption tax to 10% by FY15 from 5% now. The measure is back-loaded (planned to start in FY14) and remains highly politically controversial.

Douglas A. McIntyre