The rating agency Standard & Poor’s (S&P) has downgraded Japan one notch from AA to AA-after having been placed on a long negative watch by the company.
The reasons given for the country’s first rating drop in 9 years were that Japan has no ‘coherent strategy‘ to either control its massive deficits nor to put the required reforms in place.
The concerns are that the Japanese Prime Minister Naoto Kan has not done anywhere near enough to deal with the world’s largest debt of $11 trillion (943 trillion yen).
Following on from this S&P also downgraded five electric power companies and two gas companies to AA- (Tokyo Electric Power Co. Inc. (TEPCO), Chubu Electric Power Co. Inc., Shikoku Electric Power Co. Inc., Okinawa Electric Power Co. Inc., Electric Power Development Co. Ltd. (J-Power), Tokyo Gas Co. Ltd., and Osaka Gas Co. Ltd.).
Quoted in Bloomberg, Azusa Kato, an economist at BNP Paribas in Tokyo said ‘I hope this serves as a warning for the government, they have absolutely no sense of crisis. Once bond yields spike and the fire is lit, the amount needed to finance Japan’s borrowing needs is going to jump and it’s going to be too late.’
S&P’s Asian analyst says that the Japanese economy is now the same size in nominal terms as it was in 1992 but its debt has tripled and has a budget deficit of 8% of GDP that ‘is not affordable‘, which shows no real sign of being dealt with. They also have a bit of a demographic time bomb in that their population is rapidly shrinking and the already world record median age of 44.4 years is still rising. Their savings rate has also dropped from 15% of GDP to 3% and may turn negative as the ageing population eats into its assets.
The Telegraph‘s Ambrose Evans-Pritchard points out that although Japan has suffered downgrades before it has never done much damage to them but that was ‘in a different world‘ and it should serve as a warning to the US and Europe. In his article he quotes Julian Jessop from Capital Economics who said “This is potentially a much bigger story than any default in Greece,” as there are global implications stemming from Japan also being the world’s largest external creditor. These funds may have to be taken back home to deal with their internal problems causing a drop in global asset prices. Dylan Grice of Societe Generale painted a very bearish picture saying ‘ …….. The Japanese are facing a problem that no country has ever faced before. I think Japan is already is beyond the pale“.