Japan Rating Outlook Lowered to Negative by S&P on Quake Rebuilding Costs

Standard and Poor's made another cut today cutting Japan's sovereign-rating outlook to "negative" due to the reconstruction the nation needs after the earthquake and tsunami disasters.

By Aki Ito and Keiko Ujikane
Apr 27, 2011 2:24 AM MT
BLOOMBERG

Japan’s sovereign-rating outlook was cut to “negative” by Standard & Poor’s as the nation’s reconstruction needs following last month’s earthquake will likely add to what’s already the world’s biggest debt load.

The outlook on Japan’s local-currency debt rating, at AA-, the fourth-highest grade, was lowered from “stable,” S&P said in a statement today. The company had reduced the rating by one step in January in the first cut since 2002. Moody’s Investors Service said last month the disaster may bring forward the “tipping point” for the country’s bond market.

Today’s decision adds to pressure on Prime Minister Naoto Kan, who has yet to detail how the rebuilding will be paid for and how he plans to rein in longer-term fiscal deficits. A cross-party group of senior lawmakers said that Kan shouldn’t raise taxes, and called on the central bank to buy more government bonds instead.

“Japan has repeatedly suffered under poor leadership, but this disaster has made that point even clearer,” said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “The government needs to decide how it’s going to fund its next reconstruction package.”

The yen slid to as low as 81.78 against the dollar after the announcement, before trading at 81.59 at 2:24 p.m. in Tokyo. Japanese government bond prices fell, with the benchmark 10-year yield rising one basis point to 1.225 percent. The Nikkei 225 (NKY) Stock Average rose 1.4 percent after improved earnings in the U.S. added to signs of strength in the global economy.

Retail Sales

As public spending increases, revenue will likely decline because of the economic hit from the earthquake, tsunami and nuclear radiation crisis, with a report today showing retail sales tumbled the most in 13 years last month.

“It’s wrong to immediately raise taxes from a macro- economic standpoint, and we should use government bonds,” Sakihito Ozawa, a former environment minister and member of Kan’s Democratic Party of Japan, said at a press conference in Tokyo today. “The Bank of Japan should buy bonds in purchase operations to raise cash.”

Ten legislators from the DPJ, the main opposition Liberal Democratic Party, the New Komeito Party, the Social Democratic Party, the Your Party and the People’s New Party attended the briefing. They made no specific mention of pushing the BOJ to directly underwrite government debt, a suggestion Governor Masaaki Shirakawa and administration officials have rejected.

Rebuilding Cost

S&P predicted that rebuilding will cost as much as 50 trillion yen ($611 billion), with 30 trillion yen its “central forecast.” That will require more borrowing, boosting net government debt to 145 percent of gross domestic product in fiscal 2013, compared with an earlier forecast of 137 percent, S&P estimated.

Kan’s first of what may be multiple extra budgets for reconstruction is for 4 trillion yen. The package, including public works to rebuild roads, bridges, ports and other infrastructure in devastated northeastern areas, may create about 200,000 jobs, the Cabinet Office said in a statement today.

“Much will depend on Japan’s political leadership and its ability to forge a political consensus on how to offset fiscal measures in the future,” S&P said. “A downgrade is possible if Japan’s public finances weaken further over the next two years in the absence of fiscal consolidation.”

Japan must work to restore its fiscal health while doing everything it can to rebuild, Finance Minister Yoshihiko Noda said after the announcement. Moody’s today reported no change to its negative outlook for Japan’s Aa2 grade rating, the third highest, after a reduction from “stable” in February because of political gridlock.

Rising Debt

Japan’s public debt will probably rise 5.8 percent to 997.7 trillion yen in the year started April 1, from a projected 943.1 trillion yen last year, the Finance Ministry said in January.

The Organization for Economic Cooperation and Development last week urged Kan’s government to at least double a sales tax to 10 percent and to implement increases as soon as possible. Total public debt will reach 204 percent of gross domestic product this year, according to the OECD, the highest level among nations tracked by the group.

“We’ll continue to work to maintain and secure trust in Japanese government bonds,” Chief Cabinet Secretary Yukio Edano said after S&P’s announcement, while declining to comment specifically on the change.

Japan maintains its credit rating for now because of a strong financial system, a surplus of funds within the nation and a “diversified” economy, according to S&P.

Bond Yields

“Japan continues to have an abundance of savings, so bond yields are unlikely to surge,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “If the central bank helps with reconstruction by adding further monetary stimulus, Japan will probably be able to avoid a fiscal collapse.”

After spending to counter the global financial crisis, governments in developed nations are struggling to rein in debt, with S&P last week revising the long-term outlook for the AAA credit rating held by the U.S. to “negative” from “stable.”

That assessment means that the firm sees a one-in-three chance of a downgrade within two years. S&P sees a “material risk” that U.S. policy makers may fail to agree on how to address medium- and long-term budgetary challenges by 2013.

In Europe, ratings companies have this year downgraded Portugal, Greece and Ireland, with yields on those nations’ securities reaching records amid speculation that they will restructure debt.

Worse Than Lehman

European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said yesterday that such a move by Greece would be “more devastating” than the collapse of Lehman Brothers Holdings Inc. in 2008.

Nations to get ratings upgrades this year have included Indonesia, Ecuador, Chile and Brazil.

Economists estimate that Japan’s GDP will shrink the most since the global credit crisis this quarter, before restoring expansion in the second half of the year. The economy may contract 3 percent in April-to-June, according to the median of 18 estimates in a Bloomberg News survey this month.

Retail sales slumped 8.5 percent in March from a year earlier, according to a statement by the trade ministry in Tokyo today. None of 14 economists surveyed by Bloomberg News forecast such a large decline. Toyota Motor Corp. (7203) led a record drop in auto sales in March and retailers Aeon Co. and Seven & I Holdings Co. expect full-year profit to slide.

“Everything is working against consumers, from the power shortage to a general reluctance to spend after the tragedy,” Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo, said after the report. “It’s looking increasingly likely that March was the worst month on record for consumer spending, and it’ll take a while before spending returns to pre-quake levels.”

To contact the reporter on this story: Ken McCallum at kmccallum4@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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