22.05.2012
By Simon Miller
Fitch has downgraded Japan due to the country's "leisurely" approach to fiscal consolidation.
Its long-term foreign and local currency issuer default ratings (IDRs) have been downgraded to 'A+' from 'AA' and 'AA-' respectively with negative outlook.
Japan's ceiling is downgraded to 'AA+' from 'AAA' and the short-term foreign currency IDR is affirmed at 'F1+'.
The ratings agency said Japan's gross general government debt was projected to hit 239% of GDP by end-2012, by far the highest for any Fitch-rated sovereign. This debt ratio would also have risen 61pp since the global financial crisis. This compares with a median of 39pp for OECD economies and 8pp for 'A' range sovereigns. Japan is less of an outlier when account is taken of its large pile of sovereign financial assets (worth about 80% of GDP on Fitch's calculations), but net indebtedness is still rising strongly.
Despite this, Japan's fiscal management strategy envisages declines in the government debt/GDP ratio only from FY21. Fitch regarded this as a slow pace of consolidation given the scale of Japan's debt. Moreover, Japan's consolidation strategy is subject to political risk. The government's key revenue-raising plan is to hike the consumption tax to 10% by FY15 from 5% now. The measure is back-loaded (planned to start in FY14) and remains highly politically controversial.
"The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios," said Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch. "The country's fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk."
However, Fitch said the Japanese sovereign retained exceptional financing flexibility and can fund itself at low nominal yields.
"Funding flexibility is further reinforced by the role of the broader public sector in channelling savings to the sovereign: about half of government debt is held within the broader public sector. This funding strength is based on the deep pool of Japanese private sector savings, invested with strong 'home bias'. The Japanese yen is a global reserve currency and exhibits safe haven characteristics," sadi the grading note.
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