Bangkok--16 Mar--Standard & Poor's
The earthquake-related economic and fiscal impact on Japan is significant; but, given the unfolding situation, Standard & Poor's Ratings Services believes it is too early to judge the implications for the unsolicited sovereign credit rating (AA-/Stable/A-1+).
"The key factors determining the future trajectory of the sovereign credit rating on Japan include the overall macroeconomic impact of the earthquake, the pace and duration of reconstruction, and the impact on fiscal deficits," said Standard & Poor's credit analyst Takahira Ogawa. "In addition, we need to assess the government's ability to pursue its economic and fiscal reform agenda once reconstruction is well underway."
Standard & Poor's believes the impact on Japan's macro economy is difficult to assess right now, given the severity of the earthquake and tsunami and the widely sustained damage. The biggest uncertainty is related to Japan's safe shutdown of its nuclear reactors and its future energy supply.
The total cost of the reconstruction and recovery program is still unclear. It's likely, however, to be significantly higher than that in the aftermath of the Kobe earthquake in 1995. The Kobe disaster cost Japan US$159 billion (Y16.3 trillion) over 1995-2000. The costs are again likely to be spread out over several years and funded from a number of sources.
"Given the sheer magnitude of the current disaster, the rating on Japan could be affected if the debt burden were to increase materially above our pre-earthquake expectations due to a significant economic impact and reconstruction costs," said Mr. Ogawa.
The central government will fund a significant portion of the reconstruction costs, but local governments will also need to finance the efforts with their own bond issues. Policy banks could help finance reconstruction at preferential rates. Insurance will also cover some of the costs. The central government's portion would further increase its already-high general government debt levels.
Standard & Poor's believes that the markets are likely to be able to absorb this additional debt without a major increase in risk premiums, and does not expect major capital outflows. This supposition will, of course, be tested.
"We expect a sharp economic decline in the short term due to the earthquake and tsunami. Reconstruction and recovery efforts in later quarters will, however, offset some of that decline. There could be a longer-term negative impact on manufacturing activity due to a prolonged period of power shortages," said Mr. Ogawa.
The exact magnitude and duration of the economic decline are hard to estimate at this stage, due to the evolving situation with the nuclear power reactors and the unclear future of the nuclear power sector.
While continuing to assess the impact of the earthquake on the sovereign rating, we will focus on the following factors: (1) the overall macroeconomic impact-—including energy shortages--and the pace of its recovery; (2) the speed and duration of the reconstruction process; (3) the impact on fiscal deficits and debt burdens for both central and local governments; (4) negative side effects, such as inflationary pressures or large capital outflows; and (5) the ability of the government to push ahead with its fiscal and economic reform on the back of recovery once the immediate challenges of the disaster have been tackled.
This unsolicited rating(s) was initiated by Standard & Poor's. It may be based solely on publicly available information and may or may not involve the participation of the issuer. Standard & Poor's has used information from sources believed to be reliable based on standards established in our Credit Ratings Information and Data Policy but does not guarantee the accuracy, adequacy, or completeness of any information used.
Media Contact:
David Wargin, Washington, DC (1) 202.383.2298,
[email protected]
Analyst Contacts:
Takahira Ogawa, Singapore (65) 6239-6342
Elena Okorotchenko, Singapore (65) 6239-6375