Bangkok--19 Jan--Moody's Investors Service
Moody's Investors Service indicated that an accommodative monetary policy stance by the Bank of Japan (BOJ) is needed in Japan until inflation and nominal economic growth become much more firmly entrenched if the government is to effectively deal with its large outstanding debt.
"While we share the view of the BOJ that Japan's economy is on an improving trend, deflationary pressures persist and official forecasts of real GDP growth do not envisage any appreciable acceleration beyond 2.0 percent from fiscal 2006 to2007," said Moody's Vice President Thomas Byrne. "There are no clear signs of inflation becoming embedded in the Japanese economy."
He said Japan's nominal GDP growth will likely lag real GDP growth in FY2006 and barely exceed real growth in FY2007. Since the BOJ ended its zero interest rate policy in July 2006, the increase in the core CPI has leveled off at around 0.2 percent on a year-on-year basis. Headline CPI is barely higher, and the GDP deflator has remained stubbornly negative this fiscal year, even though the government had expected it to move into positive territory.
Moreover, although the government forecasts that core CPI will accelerate to only 0.5 percent in FY2007, Byrne explained that outside observers see the CPI decelerating in early calendar year 2007 and even possibly dipping into a negative range before climbing again.
"Our change in outlook to positive from stable on Japan's A2 Japanese government bond rating in mid-2006 was prompted by the BOJ's success in helping to ease deflationary pressures and in the government's success in reducing its fiscal deficits," said Byrne. "We think that an inflection point is at hand in which the rise in Japan's debt trajectory has probably reached a plateau."
For Moody's to move the government bond (JGB) rating up, he said, the rating agency would look for continued deficit reduction, prospects for higher nominal GDP growth — which requires more inflation than currently seen — and an improvement in the trajectory of government debt. Ultimately, he said, higher rates of nominal GDP growth will be needed to drive a significant reduction in Japan's high level of government debt — higher than either the BOJ or government are forecasting for the medium term, which are in the 3.0 to 3.5 percent range.
"While a cautious and gradual 'normalization' of interest rate levels does not necessarily jeopardize Japan' economic recovery against a background of accelerating nominal GDP growth, a premature ending of the BOJ's accommodative policy stance would likely postpone, if not set back, fiscal consolidation," said Byrne "Such a course of action which has those consequences, would, if taken, likely have negative credit implications."
New York
Vincent J. Truglia
Managing Director
Sovereign Risk Unit
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Guido Cipriani
Senior Vice President - Team Lea
Sovereign Risk Unit
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Thomas J. Byrne
VP - Senior Credit Officer
Sovereign Risk Unit
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653