Fitch cuts Japan's credit rating, cites huge debt

Agence France-Presse

Posted at May 22 2012 06:45 PM | Updated as of May 23 2012 02:45 AM

TOKYO - Fitch cut Japan's credit rating by two notches on Tuesday, citing its "leisurely" efforts at shrinking a massive public debt, as Tokyo struggles to kickstart the world's third-largest economy.

The global agency downgraded Japan's long-term foreign currency rating to 'A+' from 'AA', with a negative outlook, noting "growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios."

Japan has an eye-watering national debt that amounts to more than twice its gross domestic product, the highest among industrialised nations, a problem that would usually mean paying a high premium to borrow funds.

But its bonds are mostly held by domestic investors, meaning Japan pays low interest rates on its debt and is less vulnerable to criticism from foreign buyers over its fiscal management -- a fate that has befallen Greece.

However, Fitch said Japan's debt load is projected to hit 239 percent of output by year's end, "by far the highest for any Fitch-rated sovereign" debt.

"The country's fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk," the ratings agency said in a statement.

Fitch also warned that "a lack of new fiscal policy measures aimed at stabilising public finances amid continued rises in government debt ratios could lead to a further downgrade."

Finance Minister Jun Azumi said Tuesday that Tokyo would continue to hack away at the country's debt load, declining to comment directly on the Fitch downgrade.

"I'd like to move ahead with fiscal reform, while making efforts to enact the tax and social security reform bills," Azumi told reporters.

Prime Minister Yoshihiko Noda is trying to double Japan's consumption tax to 10.0 percent in a bid to stem the surging national debt, as the costs of a rapidly ageing population heap pressure on public coffers.

Fitch noted that Japan has "exceptional financing flexibility" owing to the low yields it pays on government bonds, with the rate on a 10-year Japan government bond hitting a near decade-low of 0.815 percent last week.

That is less than Europe's top economy Germany pays to service its debt.

Japan also has a high personal savings rates, while the yen is a global reserve currency that has emerged as a safe haven unit, Fitch said, amid worries over Europe's economy and a slow recovery in the United States.

"Japan's sovereign ratings are supported by fundamental structural strengths including one of the world's most advanced high-income economies and strong public institutions," it said.

"However, its demographic profile is a structural weakness," it added.

With a chronically low birth rate, nearly one-quarter of Japan's 128 million people is older than 65, threatening growth and its ability to finance an increasingly expensive social security system.

The Fitch downgrade comes just days after Tokyo upgraded its view of the economy for the first time in nine months, after better-than-expected growth figures and thanks to a pickup in exports and consumer spending.

Japan's economy grew 1.0 percent in the three months to March, offering a glimmer of hope for an economy hampered by years of deflation and stuttering growth.

The moribund economy was also hammered last year by the quake-tsunami disaster and severe flooding in Thailand, which hurt manufacturers with plants in the country.

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