Singapore, December 01, 2014 -- Moody's Investors Service today downgraded the Government of Japan's
debt rating by one notch to A1 from Aa3. The outlook is stable.
The key drivers for the downgrade are the following:
1. Heightened uncertainty over the achievability of fiscal deficit
reduction goals;
2. Uncertainty over the timing and effectiveness of growth enhancing
policy measures, against a background of deflationary pressures;
and
3. In consequence, increased risk of rising JGB yields and
reduced debt affordability over the medium term.
The A1 rating reflects the government's significant credit strengths,
including a large, diverse economy with a strong external position,
very high institutional strength and a very strong domestic funding base.
The stable outlook reflects the broad balance between upside risks including
significant fiscal consolidation and a resumption of economic growth,
and downside risks including intensification of deflationary pressures
and loss in economic momentum.
The rating action does not affect Japan's Aaa foreign currency,
local currency country and bank deposit ceilings. Those ceilings
act as a cap on ratings that can be assigned to the obligations of other
entities domiciled in the country.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE
DRIVER 1: HEIGHTENED UNCERTAINTY OVER REACHING FISCAL TARGETS AND
CONTAINING DEBT
The first driver for the downgrade of the Japan government's debt
rating to A1 is the rising uncertainty over whether the government's
medium-term deficit reduction goal is achievable, and whether
policy makers can overcome the tensions inherent in promoting growth while
simultaneously stabilizing and reversing the rising debt trajectory.
The Bank of Japan remains committed to monetary expansion, with
some positive impact on core CPI inflation. However, while
monetary expansion has boosted domestic aggregate demand to some extent,
the consumption tax increase on April 1 2014 has exerted even more powerful
downward pressure. At least in the short term, deficit reduction
is undermining the growth revitalization objective of Prime Minister Shinzo
Abe's economic policy strategy.
The government's response, to announce a delay in the second
step in the consumption tax increase, appears to represent a shift
in policy towards stemming re-emerging deflationary pressures on
economic growth and away from near-term fiscal deficit reduction.
This strategy could have merits. In our view, the government's
target of halving the primary deficit balance, excluding budgetary
interest payments, by fiscal 2015 from its fiscal 2010 level will
be difficult to achieve without more robust nominal GDP growth and hence
improved buoyancy in tax revenues. In their absence, reaching
the long-term target of a primary balance surplus by 2020 will
be even more challenging.
However, the strategy also poses risks to fiscal consolidation and,
over the longer-term, to debt affordability and sustainability.
Japan's deficits and debt remain very high, and fiscal consolidation
will become increasingly difficult to achieve as time passes given rising
government spending, particularly for social programs associated
with a rapidly ageing population.
The government acknowledges that additional but as yet unidentified economic
and fiscal reforms will be needed for Japan to achieve its primary balance
target in the second half of this decade. But the postponement
of the second stage of the increase in the consumption tax has resulted
in the delay of the 2015 budget, and a concrete plan to meet fiscal
targets is not likely to emerge until the second half of 2015.
The trajectory of government debt, projected at 245% of GDP
in 2014 according to the IMF, will only start to decline under the
most favorable combination of economic and fiscal reforms, including
tax and social security system reforms and total factor productivity improvements,
an end to deflation and achievement of annual nominal GDP growth of more
than 3.5%. Given current domestic circumstances and
lackluster external demand for Japan's exports, achieving
these conditions will be challenging.
DRIVER 2: ECONOMIC GROWTH POLICY UNCERTAINTIES AND CHALLENGES IN
ENDING DEFLATION
The second driver for the downgrade is the rising uncertainty over the
government's ability to enhance medium term growth through structural
economic reform -- the third 'arrow' of Abenomics --
success in which will be crucial to achieve fiscal consolidation.
While some indicators suggest a pick-up in economic activity over
the past year, potential economic growth remains low.
GDP growth sharply contracted in the second quarter of this year following
the introduction on 1 April of the first step of the consumption tax increase,
to 8% from 5%. Output was also affected by adverse
weather in the summer to some extent. And both real and nominal
GDP contracted again in the third quarter of the year, putting Japan's
economy in recession for the third time since global financial crisis.
Moreover the relapse of the GDP deflator, the broadest measure of
price movements, into negative territory in the third quarter of
this year highlights the difficult nature of ending more than a decade
of deflation. Although the ratcheting up by the Bank of Japan of
its quantitative easing policies in October may once again move the deflator
back onto positive ground in the fourth quarter of 2014, the task
ahead for economic revitalization and price reflation is looking more
challenging than envisaged by Prime Minister Abe when he introduced his
three-arrow economic policy package in March 2013.
Looking further ahead, the most notable structural reform measure
to be implemented to date is a reduction in corporate taxation beginning
in fiscal 2015. The details have yet to be announced, and
the implications for business investment are therefore still unclear.
It is not yet clear what further measures the government will choose,
or be able, to take to address the deep-rooted structural
problems of Japan's economy, including broadening labor force
participation, enhancing corporate governance and dealing with the
challenges posed by demographic trends.
DRIVER 3: EROSION OF POLICY EFFECTIVENESS AND CREDIBILITY COULD
UNDERMINE DEBT AFFORDABILITY
The third driver for the downgrade is the potential implications of the
first two drivers for the affordability and sustainability of Japan's
huge debt load. Debt sustainability will rest on the continued
willingness of domestic investors to provide funding at affordable rates
for the government. This looks likely to remain the case as long
as investor confidence is not undermined. The JGB market has been
characterized by low and stable interest rates despite the exceptional
rise in debt since the 1990s. And JGB interest rates have remained
low and stable through a number of crisis episodes, including Japan's
1997-1998 financial crisis, the 2008 global financial crisis
and the 2011 tsunami and Fukushima nuclear power plant disaster.
Nonetheless, the Bank of Japan's efforts to raise inflation
to 2% may eventually put pressure on government bond yields and
thereby raise government borrowing costs. Rising interest rates
would increase expenditure and offset gains from revenue buoyancy.
Rising uncertainty regarding the government's capacity to deliver
on its policy objectives could raise yields without any commensurate rise
in revenues. Either outcome would further undermine the government's
ability to meet its fiscal deficit targets and reduce its debt burden
over the medium term, and eventually start to undermine debt sustainability.
RATIONALE FOR A1 RATING AND STABLE OUTLOOK
JAPAN'S CREDIT STRENGTHS SUPPORTED BY A DEEP DOMESTIC BOND MARKET,
STRONG INSTITUTIONS, LOW VULNERABILITY TO EXTERNAL SHOCKS
Whatever the challenges facing the government, Japan retains very
significant credit strengths. Its A1 rating and stable outlook
are supported by its large, diverse economy, which we characterize
as having 'High' economic strength. And even with the
very significant debt burden, we believe that Japan exhibits only
'Low' susceptibility to event risk. A marked home bias
on the part of resident investors provides a strong funding base —domestic
investors retain a marked preference for government bonds, which
has allowed fiscal deficits to be funded at the lowest nominal rates globally
over the past two decades. Private sector fiscal surpluses remain
more than adequate to fund government deficits, without the government
resorting to external funding. We believe that very high institutional
and structural strengths, including a decisive and powerful central
bank, currently sustain this funding advantage and are very unlikely
to diminish over the rating horizon.
Although Japan's government gross financing requirements are far
larger than other advanced country governments', contingent risks
which could elevate further such financing needs are low and remote.
Japan's banking and corporate sectors have restored their health
in recent years in terms of capitalization and deleveraging. Household
debt is at a moderate level and has remained stable over the past decade.
And despite low economic growth, Japan's labor market is relatively
sound in regard to key features, such as low unemployment level,
the recent pick-up in employment and nominal wages and a labor
force participation rate broadly comparable with other advanced economies.
Related to Japan's home bias is its strong external payments position,
which reflects the accumulated system-wide savings. At more
than 60% of GDP in 2013, Japan's net international
investment position is much larger than any advanced industrial G-20
economy, insulating its economy and capital market from global shocks.
Income earned from Japan's sizable external assets has helped to
sustain the current account surpluses, although this has diminished
owing to a shift into a trade deficit which is in large part driven by
the demand for energy imports following the shutdown in the nuclear power
industry after the 2011 tsunami and Fukushima nuclear power plant disaster.
WHAT COULD MOVE THE RATING DOWN / UP
While the stable outlook indicates that we believe the rating is well
positioned for the next twelve to eighteen months, factors that
could prompt a negative rating action include significant divergence from
the path toward achieving fiscal targets; an intensification of deflationary
pressures; a severe loss in economic momentum; or a shift in
the external current account surplus into persistent deficit.
Moody's would consider a positive rating action if Japan were to
implement policies that we concluded were likely to restore economic momentum
and improve prospects for significant fiscal consolidation and debt reduction.
GDP per capita (PPP basis, US$): 36,654 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.5% (2013 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.6%
(2013 Actual)
Gen. Gov. Financial Balance/GDP: -8.2%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.7% (2013 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 26 November 2014, a rating committee was called to discuss the
rating of the Japan, Government of. The main points raised
during the discussion were: The issuer's institutional strength/framework,
have materially decreased. The issuer's fiscal or financial strength,
including its debt profile, has materially decreased. An
analysis of this issuer, relative to its peers, indicates
that a repositioning of its rating would be appropriate.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
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 certain 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 certain 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 certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Thomas J Byrne
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Alastair Wilson
MD-Global Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's downgrades Japan to A1 from Aa3; outlook stable
