Singapore, August 24, 2011 -- Moody's Investors Service today lowered the Government of Japan's
rating to Aa3 from Aa2, concluding the rating review that began
on May 31. The outlook is stable.
The rating downgrade is prompted by large budget deficits and the build-up
in Japanese government debt since the 2009 global recession. Several
factors make it difficult for Japan to slow the growth of debt-to-GDP
and thus drive this rating action.
Over the past five years, frequent changes in administrations have
prevented the government from implementing long-term economic and
fiscal strategies into effective and durable policies. The March
11 earthquake and tsunami, and the subsequent disaster at the Fukushima
Daiichi Nuclear Power Station, have delayed recovery from the 2009
global recession and aggravated deflationary conditions. Prospects
for economic growth are weak, making it more difficult for the government
to achieve deficit reduction targets and implement its Comprehensive Tax
and Social Security Reform plan.
Support for the stable outlook comes from the undiminished home bias of
Japanese investors and their preference for government bonds, which
allows the government's fiscal deficits to be funded at the lowest
nominal rates globally. We believe that this funding cost advantage
will be sustained by considerable institutional and structural strengths,
which will prevail even with large budget deficits in 2011 and 2012.
The rating action does not affect the Aaa country and bank deposit ceilings,
the outlooks for which remain stable. Those ceilings act as a cap
on ratings that can be assigned to the obligations of other entities domiciled
in the country. Japan's short-term rating is unaffected
and remains unchanged at P-1.
RATINGS RATIONALE
The global financial crisis has had a severe effect on Japan's economy.
The current government now forecasts a primary budget surplus (excluding
interest payments on government liabilities) by 2020, versus the
former Koizumi government's target of a budget surplus by 2012.
Headline general government budget deficits will remain approximately
at or above 7% of GDP through 2015, according to the Cabinet
Office's "prudent" projection, well exceeding nominal GDP growth
rates and thereby contributing to the inexorable rise in the debt-to-GDP
ratio.
Large deficits and the collapse of growth since the early 1990s have led
to an overhang of government debt that is by far the largest among the
major advanced economies. That assessment holds true based on either
the International Monetary Fund's (IMF) 2011 projection of 233%
of GDP or the Cabinet Office's projection of 181% (the IMF
has a broader accounting definition). Moreover, neither the
IMF nor the Cabinet Office foresees containing or reducing the debt burden
over the next decade under the current policy framework.
The March earthquake and nuclear disaster may make it difficult for the
government to stay under its JPY44 trillion annual budget borrowing ceiling
(which excludes special reconstruction bonds) in the current or next fiscal
year, though the government's new Medium-Term Fiscal
Framework for 2012-14 repeats its commitment to adhering to that
target. The government estimates that the total fiscal cost will
be 5% of the current year's GDP, but that will be spread
over 10 years.
The March earthquake also undermined Japan's recovery from the 2009
global recession. Consumer spending has softened further and deflationary
pressures have intensified. Also, the strength of future
investment growth is more uncertain even though supply chain disruptions
are normalizing. This is because power capacity will be reduced
from the loss or suspension of supply from nuclear power plants in Fukushima
and elsewhere in the country. Japan's economy has been in
recession for three consecutive quarters from October 2010 through June
2011.
In particular, the consequences of the Fukushima Daiichi Nuclear
Power Station disaster have not fully played out, and it is not
yet possible to precisely quantify its impact. The government may
be exposed to contingent liabilities even after it establishes a special
compensation entity that places the burden on the nuclear power industry.
Furthermore, reductions in the national power supply from a crippled
and suspect nuclear power sector would intensify headwinds against economic
growth.
These developments further hamper the economy's ability to achieve
a growth rate strong enough to steadily reduce the budget deficit.
Although the government and ruling party unveiled a comprehensive fiscal
reform plan on June 30, which identifies a broad range of measures
to be taken, it lacks precision. In addition, a divided
Diet and tensions within the ruling Democratic Party of Japan risk both
the timing and implementation of the reform plan. Indeed,
the imminent change in the party's presidency and the election of a new
prime minister reflect the factious nature of the country's politics.
While the government sees as feasible its medium-term policy target
of a halving of the primary budget deficit (excluding interest payments)
to approximately 3% of GDP by 2015, assuming the government
doubles the consumption tax to 10% by the middle of the decade,
its ultimate goal of achieving a primary surplus by 2020 would require
additional, and yet unidentified, fiscal measures.
Moreover, even under the government's more vigorous and optimistic
economic growth scenario, a decline in the debt-burden trajectory
would remain elusive.
CREDIT SUPPORT FACTORS
Japan's very large economy and very deep financial markets provide
the wherewithal to absorb economic shocks. Its dependable domestic
funding base provides an exceptional home bias for the government,
which can fund itself at a lower nominal cost than any other advanced
economy. Furthermore, throughout the global financial crisis,
in the months after the March earthquake, and in recent days with
renewed turmoil in global markets, JGBs continue to demonstrate
exceptionally strong safe-haven features.
Related to Japan's home bias is its strong external payments position,
which insulates the country from global financial market shocks.
In addition to a seemingly structural current account surplus on the balance
of payments, its net international investment position at more than
50% of GDP is the largest of any industrialized advanced country,
and is almost twice as large as that of Germany. In fact,
net income receipts from overseas assets provide a bigger contribution
to the current account surplus than the trade balance.
The steady appreciation of the yen to post-war highs is a headwind
against export competitiveness, although the lack of price and wage
inflation in Japan somewhat offsets this effect. Even if exports
falter as a source of economic growth, we expect Japan's external
position will retain its strengths.
And although the government's June 30 Comprehensive Tax and Social
Security Reform plan is not fully worked out, it will help to sustain
market confidence if, in the not-too-distant future,
the government executes policies on a timely basis and economic growth
recovers to support the fiscal adjustment process.
CREDIT TRIGGERS FOR A FUTURE RATING ACTION
Credit-positive factors that could lead to a positive ratings outlook
and could eventually lead to a ratings upgrade:
1. Well-established progress in achieving fiscal consolidation
targets
2. A robust and sustainable recovery from the recession
Credit-negative factors that could lead to a negative ratings outlook
or prompt a ratings downgrade include:
1. A delay in implementing the comprehensive tax and social security
reform plan
2. The economy's inability to recover from the lingering
effects of the global recession and the ongoing consequences of the March
earthquake, tsunami and nuclear power plant disaster
3. A diminished home bias in the government bond market or substantial
erosion in Japan's external strengths, which at some point
would cause the market to price in a risk premium to government debt,
making sizable annual refinancing requirements significantly more costly
PREVIOUS RATING ACTION & METHODOLOGY
The last rating action on the Government of Japan was on May 31,
when its government bond ratings were placed on review for downgrade.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
Press releases of other ratings affected by this action will follow separately.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not an auditor
and cannot in every instance independently verify or validate information
received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
New York
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service, Inc.
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SUBSCRIBERS: 212-553-1653
Moody's Investors Service Singapore Pte. Ltd.
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Moody's lowers Japan's government rating to Aa3; outlook stable
