Moody’s Japan Outlook And The Price Of Oil

Moody’s put the rating of Japan’s debt on credit watch. The outlook was cut to “negative” from “stable.” The government of Japan’s current rating is Aa2. Moody’s said,

“The rating action was prompted by heightened concern that economic and fiscal policies may not prove strong enough to achieve the government’s deficit reduction target and contain the inexorable rise in debt, which already is well above levels in other advanced economies.”

There was no comment on the future price of energy and what it might do to business stability and consumer activity in the world’s third largest economy by GDP, but there should have been.

Japan ranks No.75 among the world’s nations in oil reserves. It does not produce nearly as much crude as it needs to import. There is no perfect measurement of what $100 oil prices would do to the Japanese economy, particularly if that price remained at that level for several months. The odds are, however, that it would be devastating.

Several of Japan’s largest companies such as Shin-Etsu Chemical and Inpex would be affected by high oil prices. Japan’s gasoline prices are already among the highest in the world.

Nominal GDP growth in Japan was only 1.9% in 2010. Moody’s forecast is that the figure will be low for as long as a decade. High oil prices might contribution to inflation, which Japan has not faced in years. Even if economists believe that some modest inflation would help an economic rebound in Japan, very high oil prices would cause a contraction.

The Moody’s decision on Japan and its lack of reference to energy prices, if repeated in the analysis of other developed nation sovereign debt, may distort the credit ratings for those nations. Oil prices have shot up and the interruption of supply from the Middle East could go on for months. Libyan oil field production has already begun to drop. The instability of the Gadhafi government may be replaced by an equally unsteady administration. Analysts believe that the problems in Libya and in other nations in the region could damage the solidarity of OPEC. There is no good analysis of what this may do to the price of crude, but instability is usually not part of a formula for falling energy prices.

Moody’s and its competition are usually late as they assess risk. They were not late on seeing the instability of oil producing nations because they have already downgraded Libya and other nations in the region. The nations that need large amounts of imported crude are another matter.

Douglas A. McIntyre