Japan’s Sovereign Credit Rating Cut One Step to Aa3 by Moody’s

Lily Nonomiya and Christopher Anstey
Aug 23, 2011 7:16 pm ET

Aug. 24 (Bloomberg) -- Japan’s sovereign-credit rating was lowered by Moody’s Investors Service, which cited “weak” prospects for economic growth that will make it difficult for the government to rein in the world’s largest public debt burden.

Moody’s lowered the grade by one step to Aa3, with a stable outlook, it said in a statement released today. The company put the nation’s rating on review for a downgrade in May, calling on the government to step up its efforts to narrow the budget gap.

The move follows the first cut of the U.S.’s sovereign grade this month by Standard & Poor’s and comes as concern deepens on whether the euro area’s debt crisis may worsen. Japan’s public debt is projected to reach 219 percent of gross domestic product next year even before accounting for borrowing to fund reconstruction after the March 11 earthquake, according to the Organization for Economic Cooperation and Development.

Japan’s government has amassed a debt of 943.8 trillion yen, according to the Finance Ministry, after two decades of fiscal spending to energize an economy hobbled by the collapse of an asset bubble in 1990 and lingering deflation that’s sapped private demand. The yen’s advance to a post World War II high this year also threatens exports, a main driver of the nation’s economic growth.

Prime Minister Naoto Kan’s efforts to reduce Japan’s debt have been stymied by opposition within his party to tax increases. Kan has also said he would step down once a second extra budget and bills for renewable energy and deficit-bond funding are passed, reducing his authority.

IMF’S Call

The International Monetary Fund said on July 19 that Japan needed to push forward with new tax measures and limit bond issuance to pare its debt. It recommended raising the sales tax to 7 percent to 8 percent in 2012 from 5 percent, then gradually increasing it to 15 percent over several years.

“Insufficient fiscal adjustment could lead to a spike in JGB yields which, even if the effects were contained, could trigger financial volatility and prove highly disruptive,” according to the IMF, referring to Japanese government bonds.

The IMF also said that outstanding government bonds could exceed total financial assets owned by households in five to 10 years barring policy changes, suggesting the government may need to rely more on foreign investors to fund its deficits.

The government has pledged to raise the sales tax to 10 percent by the middle of the decade, a rate that would still be below the IMF’s recommendations. The additional revenue is intended to pay for social welfare for the aging population.

Spending Plans

Japan’s government plans total spending of 19 trillion yen over five years to rebuild after a magnitude-9 temblor and tsunami devastated the northeast coast of Japan and triggered the worst nuclear crisis since Chernobyl.

The world’s third-largest economy has shown signs of overcoming its slowdown after the quake, with industrial production rising at the fastest pace in more than 50 years in May. Companies are saying they plan to increase capital spending despite damage they incurred from a temblor that has left around 20,000 people dead or missing.

The yen’s advance against the dollar and signs of a slowdown in the global economy pose risks for Japan’s rebound after the quake. Japanese authorities intervened in the currency market for the first time since March on Aug. 4 to try to stem the yen’s gains.

S&P replaces president with Citibank exec after U.S. downgrade

Abhishek Takle in BANGALORE and Wayne Cole and Mark Bendeich in SYDNEY |
Reuters – 8/23/2011

SYDNEY/BANGALORE (Reuters) - The chief of Standard & Poor's will step down next month, to be replaced by a senior Citibank executive, in a move announced a few weeks after the credit rating agency downgraded U.S. government debt and sparked a row with Washington.

S&P's parent, McGraw-Hill Companies Inc, said on Tuesday that Deven Sharma, who has served as S&P president since 2007, would step down on September 12, to be succeeded by Citibank chief operating officer Douglas Peterson.

"S&P will continue to produce ratings that are comparable, forward looking and transparent," McGraw-Hill said in a statement, adding that Sharma would work on a strategic portfolio review for the group until leaving at year-end.

The U.S. downgrade on August 5 helped lead to the biggest sell-off in share markets since the global financial crisis three years earlier and sparked a row with the U.S. Treasury over some of the agency's calculations in arriving at the new rating.

The U.S. Justice Department is also investigating the ratings agency over its actions on mortgages leading up to the 2008-2009 crisis, a source familiar with the matter told Reuters last week.

But the Financial Times, which first reported the news of Sharma's resignation, quoted unnamed sources on Tuesday as saying his departure was unrelated to the downgrade or the Justice Department investigation.

The board of McGraw-Hill Companies made the decision to replace Sharma at a meeting where it also discussed its ongoing strategic review on Monday, the Financial Times said.

McGraw-Hill directors and executives met on Monday with Jana Partners LLC, a hedge fund, and the Ontario Teacher's Pension Fund to hear their arguments that the company should be broken up.