World Economy

S&P Downgrades Japan’s Sovereign Rating

S&P Downgrades Japan’s Sovereign RatingS&P Downgrades Japan’s Sovereign Rating

Standard & Poor’s on Wednesday downgraded Japan’s sovereign debt rating one notch, in the latest sign of concern about Japan’s economic prospects nearly three years after Prime Minister Shinzo Abe took power.

S&P said it was lowering the rating to A-plus from AA-minus because weak economic growth makes it less likely that the government can quickly improve the nation’s fiscal health. “Despite showing initial promise, we believe that the government’s economic revival strategy—dubbed ‘Abenomics’—will not be able to reverse this deterioration in the next two to three years,” S&P said.

Both of S&P’s main competitors, Moody’s Investors Service and Fitch Ratings, have also lowered Japan’s credit rating in the past year. All three cited Japan’s huge government debt—at more than 200% of gross domestic product, the largest among developed nations.

S&P said it expects indebtedness to keep rising, although Japan raised the national sales tax to 8% from 5% in April 2014. An aging population gives the country “very weak fiscal attributes.”

Repeated warnings of Japan’s parlous state haven’t perturbed investors, who continue to accept near-record-low yields on government debt. On Wednesday, the benchmark 10-year government bond was paying 0.367%—or less than Yen 37 a year in interest on a Yen10,000 investment (about 31 cents on $83).

   Moderate Recovery

The Bank of Japan kept monetary policy on hold on Tuesday and stuck with a bullish message about growth despite deteriorating data on the Japanese economy.

Haruhiko Kuroda, the BoJ governor, insisted Japan’s economy was still enjoying a moderate recovery and claimed there was a widening trend towards higher prices.

Kuroda’s comments suggest he sees no urgent need for more monetary easing, although a growing number of analysts think he will be forced to act by weak inflation and a demand shock from China’s economic slowdown.

The BoJ will keep buying bonds and other assets at an annual rate of Y80 trillion ($663 billion) as part of an unprecedented stimulus, aimed at restoring inflation to 2% and ending a generation of stagnant or falling prices.

“There are effects through trade, investment and finance, but trade is the big one, so if China’s economy maintains stable growth our exports should too,” said Kuroda.

The BoJ made little change to its economic outlook despite recent turmoil in financial markets and a further slide in commodity prices. Its one concession was to note that “exports and industrial production have recently been more or less flat”, due to the emerging market slowdown.