With Japan's public debt about to hit 240% of GDP, Fitch Downgrades
Japan's Sovereign Rating
The ratings agency Fitch on Tuesday lowered its assessment of Japan’s sovereign credit to A+, an investment
grade just above the likes of Spain and Italy, and criticized Tokyo for not doing
more to pare down its burgeoning
Japan’s public debt
will hit almost 240
percent of its gross domestic product by the end of
the year, Fitch warned.
The new rating also heightens
the pressure on Prime Minister Yoshihiko
Noda to rein in spending
and raise taxes at a delicate time, when the Japanese economy is still recovering
from natural and nuclear disasters last year.
Mr. Noda has warned that Japan could
eventually face a debt crisis akin
to that afflicting Europe
and is staking his job on a plan to double the consumption
tax rate to 10 percent by late
2015. That increase, he
has argued, is necessary to pay for soaring welfare costs and pension payments.
But lawmakers even within his own
party have attacked the plan, saying
it would put a damper on growth just as Japan’s recovery gets on track. Even if Japan does double its sales tax, the revenue will most likely not be enough to balance in the
According to the statement,
Fitch lowered Japan’s long-term local currency rating to A+ from AA.
It also cut the country’s foreign currency rating to A+ from AA. Fitch said the outlook was negative
The A+ rating puts Japan
four notches below the
ratings of other major economies
like the United States, Britain,
France and Germany, which all retain
the top AAA rating from Fitch.
Japan’s grade is now just one notch above Spain’s
and two above Italy’s, countries that
have struggled in the European
debt crisis. Two other global ratings agencies, Standard & Poor’s
and Moody’s Investors Service, lowered Japan’s credit rating last year.
No Urgency for Japan (Until Sudden Panic Hits)
As Japan's debt careens out of control, Keynesian
clowns do not want to do anything
about it for fear of hurting the recovery. They have been saying the same thing for over 20 years.
Nonetheless, the rally cry remains No Urgency for Japan to Deal With Debt.
With Japan awash in cheap funding provided by domestic savings and local banks continuing to park their cash in government bonds,
analysts tell CNBC the country faces no urgency in dealing with its rising
public debt, despite the latest ratings cut by Fitch.
The likelihood of a Europe style debt crisis for the world's third-largest economy remains low, say analysts,
because over 90 percent of government
debt is domestically owned.
"For as long as Japan's debt
is well-held by local savers and local investors - 93
percent - the impact, I think, on risk assets is
going to be quite marginal," John Woods,
Chief Investment Officer, Citi Private Bank told CNBC's "The Call" on Wednesday.
Those low yields, however, also mean policy
makers are under no
pressure to deal with total debt
that is more than twice as large as the country’s $5 trillion economy.
has submitted plans to double the sales tax by 2015 but the law could split the ruling party
and force early election,
according to Reuters.
"As long as these yields
remain at such historically low levels, the impetus for the government to meaningfully change and reform its environment is going to be
quite limited," Woods said.
Thomas Bryne, senior vice president
at Moody’s Investor
Service, said on CNBC’s
Box” Wednesday that
his firm had issued plenty
of negative commentary since it downgraded
Japan in August last year.
about the slippage in exports, perhaps
the slippage in current account surplus, probably more concerned about the slippage in
the fiscal deficit and we
also note that attempts to put Japan on a
fiscal track are still
partial and tentative,” he said.
Long As ..."
The words "as long as" appeared twice in the above article. The key phrase was
"As long as these yields
remain at such historically low levels ...".
Japan will go from no sense of urgency to panic urgency in a
short sudden burst. Unfortunately, I cannot tell you when. However,
I can say that the slippage in exports
and current account
surplus is very
Given Japan's aging demographics, pension
plans became net sellers
of bonds last year.
For now, Japanese
corporations purchase enough
bonds to stem the tide. However,
if exports collapse or interest rates rise significantly for any reason, the party will be immediately
Bear in mind that "significantly" means a mere
hike in the 10-year rate to 2.5% or so, perhaps less.
Such a hike would consume 100% of Japan's
revenues just to meet interest on the national debt.
At that point, whenever it is,
the choice for Japan will be print
or default. Either way,
panic will set in along will a full-blown global currency crisis.