Moody's downgrades Japan's debt rating

Moody's has now cut Japan's credit rating by one notch on concerns about the country's ability to reduce their mounting debt. The economy's recovery was delayed back in March after a tsunami hit which resulted in a nuclear meltdown and severe damage for the citizens.

By Lindsay Whipp,
August 24, 2011 2:11 a.m. EDT

(FT) -- Moody's has cut Japan's credit rating by one notch citing concerns about the government's ability to reduce its mountain of debt and implement long-term fiscal sustainability measures.

Moody's now holds rating for Japan at Aa3, on a par with rival agency Standard & Poor's, which rates the world's third-largest economy at AA-, the same level as China.

Later this month, Japan will face yet another change in the country's political leadership, the frequency of which Moody's cited as a key factor obstructing the implementation of necessary fiscal measures to bring down its debt.

Naoto Kan, the incumbent, is expected to stand down as soon as this Friday as leader of the ruling Democratic party and prime minister to make way for the country's sixth prime minister in as many years.

One of the leading contenders for the job is Seiji Maehara, former foreign minister, who opposes the immediate tax rises that are being discussed as a way to finance the reconstruction of much of Japan's north-east coast, which was devastated by the March 11 tsunami.

The new prime minister will need to win co-operation from opposition parties in the hung parliament -- something Mr Kan struggled to achieve -- to address the concerns raised by the Moody's downgrade.

Moody's said that the March 11 disaster, and the nuclear accident that followed, have "aggravated" deflationary conditions and delayed the economy's recovery from its recession in 2009, its worst since the second world war.

"Prospects for economic growth are weak, making it more difficult for the government to achieve deficit reduction targets and implement its Comprehensive Tax and Social Security Reform plan," wrote Moody's analyst, Tom Byrne, in a report.

The International Monetary Fund estimates the country's gross debt will be equivalent to 233 per cent of the size of the economy this year. This will be exacerbated in the coming years by the government's expectations for annual budget deficits of at least 7 per cent through 2015, which Moody's points out exceeds nominal growth rates.

Moody's move is unlikely to affect the bond market as domestic investors hold 95 per cent of Japanese government bonds, and are well aware of the country's fiscal situation. The JGB market showed little reaction earlier this year when S&P downgraded the country's credit rating.

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