Singapore, March 14, 2011 -- Moody's Investors Service says that the shock from Friday's
earthquake does not make a fiscal crisis in Japan imminent, while
the country's deep and liquid government debt market will likely
continue to fund government deficits, and an even a larger deficit
as a result of the quake, at an exceptionally low cost.
"However, a tipping point may be reached at some point if
the market loses confidence in the soundness of government finances,
and demands a risk premium on government bonds. The earthquake
may have shifted such a potential tipping point a bit forward, unless
Japan's political parties are galvanized by the crisis to also address
the country's long-term fiscal challenges," says
Thomas Byrne, a Moody's Senior Vice President.
Byrne was speaking on the release of a special comment -- which he
authored -- on the implications of the quake for Japan's
sovereign ratings.
Prime Minister Kan on Sunday was quoted in the Nikkei as saying that the
earthquake and tsunami "is the biggest crisis facing the country
since World War II." The extent of the devastation will take
time to gauge fully, but already ripple effects beyond the devastated
zones are being seen in curtailed electricity supplies and in suspended
production in some automobile, steel and refining plants.
"Nevertheless, we see the Japanese economy as having the ability
to absorb the shock over time. In general, large, wealthy
economies have demonstrated a capacity to absorb localized natural disasters,"
says Byrne. "And Japan's $6 trillion economy,
approximately equal to Germany's and Italy's combined,
is indeed large."
"Stability to the economy in the weeks ahead will also be provided
by the Bank of Japan, which has pledged to support exceptional demands
in the financial sector, and already provided about JPY55 billion
in emergency liquidity to 13 financial institutions over the weekend,"
says Byrne.
Moreover, reconstruction spending will likely prove to be a very
effective and justifiable fiscal stimulus, and will offset immediate
losses in production and demand.
However, the immediate fiscal costs of the earthquake to the central
and regional governments will likely halt any progress in reducing the
large budget deficits which resulted from the global financial crisis
and recession. Yet, Moody's considers that Japan has
ample domestic savings to accommodate increased government funding needs.
Moreover, the country also has at its disposal the largest stock
of net international assets, equal to 59% of GDP as of 2009,
of any large, advanced economy, to help as well. The
yen will likely remain stable, minimizing the financial impact of
the natural disaster.
In terms of the possible financial effects on affected regional and local
governments, given the long history of risk socialization in Japan,
Moody's would expect that they would be would be mitigated by the
sharing of such costs with the central government in Tokyo.
Although we do not currently know how the damage and reconstruction costs
will be allocated between public funds, private insurance and private
savings, in the case of the 1995 Kobe earthquake, public funds
assumed much of the burden.
Finally, Moody's recognizes that the immediate focus of the
government must be on emergency relief and reconstruction efforts,
no matter what the fiscal cost. Indeed, both the ruling and
opposition parties agree on the need for a quick and effective response
to the immediate crisis.
However, Moody's remains concerned over the lack of a commensurate
sense of unanimity and urgency to address the longer-term need
for fiscal and economic reform and debt containment.
The report is entitled, "Japan's Economy Will Recover
from Earthquake, but Fiscal Consequences Are Less Predictable".
It can be found at www.moodys.com
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Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
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New York
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
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Moody's: Japan to recover from quake; fiscal effects less predictable