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Another debt rating agency issued another high-profile credit downgrade on Wednesday. Moody’s Investor’s Service dropped Japan’s credit rating from Aa2 to Aa3, reflecting the results of a review which began in May. Back then, the agency noted that long-term fiscal concerns, stemming from the 2009 global recession, coupled with the costs of re-building after March’s devastating earthquake and tsunami, along with Japan’s political turmoil, led to the downgrade. “Several factors make it difficult for Japan to slow the growth of debt-to-GDP and thus drive this rating action,” Moody’s said.
Moody’s also noted that Japan’s debt levels “looked bad” compared to international standards. That is an understatement. According to the International Monetary Fund (IMF), Japan has the highest debt-to-GDP ratio in the world, with a current projection of 233 percent for 2011. Japan’s Cabinet Office apparently disputes that figure, citing a level of 181 percent. Regardless of the numbers, neither entity sees the kind of political progress being made necessary to address the debt burden. Moody’s noted that reality, citing “frequent changes in administrations” as one of the primary causes for concern.
Coincidentally, another political change is coming by the end of the month. On Tuesday, Japanese Prime Minister Naoto Kan told members of his cabinet he will step down as soon as the Japanese Parliament passes three important bills. The first is a “second extra budget,” enacted in July. Next is a bill allowing the government to issue “deficit-covering bonds” for FY 2011. The third is a piece of legislation introducing a “feed-in tariff system” requiring utility companies to buy renewable energy-sourced power at fixed prices. The process is expected to be completed by the end of the week. “I will quit after all three conditions are in place,” Kan said, according to cabinet members present at a meeting of his ministers.
Kan had survived a recall vote aimed at removing him last June, when senior figures in his left-of-center Democratic Party of Japan (DPJ) initially indicated they could no longer support the man most Japanese held responsible for the mishandling of that nation’s Fukushima nuclear power plant crisis.
Whoever replaces Kan will be Japan’s sixth prime minister in five years. Six candidates are vying for the job: finance minister Yoshihiko Noda, farm minister Michihiko Kano, trade minister Banri Kaieda, former transport minister Sumio Mabuchi, ex-environment minister Sakihito Ozawa, and former foreign minister Seiji Maehara, who is the most popular candidate despite a scandal which engendered his resignation in March. Maehara had taken an illegal $3,000 political donation from a foreign national, an issue he promised to address on Friday.
Due to the shortage of time, none of the candidates were expected to delve into detailed policy issues. The focus will be on who is perceived by the voters as the candidate best able to unite the DPJ and work with opposition parties. “The whole point of the race is to replace Kan, who has been criticized for his lack of leadership and inability to work with the opposition,” said Tomoaki Iwai, a political science professor at Nihon University. “The race will be about intra-party power balances. Tax hikes and other issues will be put on the back burner.”
DPJ and its allies maintain 309 of the 480 seats in the House of Representatives, and the current crisis arose when Kan was unable to reach agreements with the center-right Liberal Democratic Party (LDP) on how to rebuild Japan’s devastated communities or infrastructure. Iwai noted that neither party has put forward a comprehensive plan for dealing with the issue. That sentiment was echoed by Yuuki Sakurai, CEO and president of Fukoku Capital Management Inc. “I had expected that the rating cut would have taken place after the election for the leadership of the Democratic Party of Japan,” he said. “But looking at the candidates, there seems to be nobody among them who would seriously tackle financial reform, so that’s why Moody’s went ahead and cut the rating.”
Thus, the downgrade was hardly surprising. Yet even as it issued the downgrade, Moody’s contended Japan’s outlook was now stable, due to the “undiminished home bias of Japanese investors and their preference for government bonds, which allows the government’s fiscal deficits to be funded at the lowest nominal rates globally.” This was Moody’s first Japanese downgrade since 2002, when the agency dropped the nation’s rating six levels to A2. Since then it has upgraded Japan three times, most recently in 2009. The current downgrade aligns Moody’s with Standard & Poor’s and Fitch Ratings. Both agencies rate Japan’s debt at double-A-minus. But unlike Moody’s, both Standard & Poor’s and Fitch Ratings have issued a negative outlook on Japanese credit going forward. This latest downgrade puts Japan’s credit rating on the same level as China, which recently replaced Japan as the world’s second largest economy.
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