Land of the Sinking Credit Rating

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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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  • Chezwick_mac

    "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."

    And how did Japan's debt get so high?…(this is instructional for Americans)….

    It got so high because of the 90s, the "lost decade" for Japan. When everyone else was riding the dot/com bubble, Japanese growth was so anemic compared to Europe and the States that the Japanese embarked on one stimulus package after another. Most of it was infrastructure spending…billions upon billions for roads, bridges, harbor and airport upgrades, etc.

    To be sure, Japan now has quite an impressive national infrastructure, but most of the improvements were un-needed. And while the spending did little to stimulate Japanese economy, their debt to GDP-ratio skyrocketed. Now, they're living with the consequences.

    If recent history has shown us anything, it's that the one real stimulus mechanism that actually works is across the board tax cuts. Kennedy did it in '61 and the US economy grew 5.2% over the next five years. Reagan did it in the 80s and the stock market almost quadrupled over his 8 years in office. Bush did it after 9-11 and we had 5 uninterrupted years of solid growth.

    You'd think Obama and co would have learned from Japanese failure and our success, but when one's worldview is ideologically fixed, learning is not a dish on the menu. Spending, spending and more spending is his natural inclination. When he talks of the need for fiscal restraint….after 3 straight years of wracking up $1 trillion-plus deficits under his stewardship, one starts to realize that the words the man utters are completely irrelevant, that he'll say ANYTHING.

    Mr President, a crafty sage once said:

    "A wise man learns from the folly of others, but a fool can only learn from his own."

    Learn from the Japanese, Mr President.

    • davarino

      Nice job Chez.

      The proof is in the pudding. It doesnt take a brain surgeon to realize this "stimulus" crap doesnt work. It didnt work for Roosevelt (it only prolonged the depression), and it didnt work for Japan, to site a few examples. But its like watching someone beat their head against the wall when people keep proposing the same old disproven solutions as though this time its going to be different.

      • Chezwick_mac

        Thanks Davarino.

        One editing point: "Kennedy did it in '61 and the US economy grew 5.2% ANNUALLY over the next five years.

      • sky The UN.72 trillion dollar lie

    • fiddler

      It also gives us pause (us meaning the whole nation) to consider carefully the vetting of ANY candidate and not use sheer emotion to make up our mind. My hope is especially that impressionable youth (i.e. college students) act as mature as they think they are and consider carefully before exercising their significant voting privilage. No more YES WE CAN emotional wave movements, it's time to courageously say what we really feel without PC constraints to guilt us into jumping on the band wagon.

  • WilliamJamesWard

    Japan will eventually fix it's energy problem with newer safer Nuclear plants. The
    causes of the failure are known and redesign can be made and even for
    more disasterious scenarios. Amazingly America's Left coast did not disappear
    in clouds of invisible radiation and Schwartzenegger left on his own. Japan
    should know it is what leaders do, not new leaders that take a nation out of
    it's problems and a leader that does nothing leaves you with nothing……….William

  • Asian Private Funds

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