Bangkok--24 Apr--Standard & Poor's
Standard & Poor's Ratings Services today said that it had raised its foreign and local currency long-term sovereign ratings on Japan to 'AA' from 'AA-'. The short-term foreign and local currency ratings were affirmed at 'A-1+' and the outlook on the long-term ratings is stable.
"The upgrade is based on Japan's progress in fiscal, monetary, and structural fronts," said Standard & Poor's credit analyst Takahira Ogawa.
Japan's general government deficit is expected to fall to 5.0% of GDP in fiscal 2007 (ending March 31, 2008), from 8.2% of GDP in fiscal 2002, due to the government's steady fiscal-consolidation efforts. The general government primary deficit is expected to improve to 0.2% of GDP in fiscal 2007, from 4.2% in fiscal 2003.
"Policymakers have been triply challenged to consolidate fiscal accounts and to restructure the private sector without restoking deflationary pressure," said Mr. Ogawa. "Our assessment is that they are meeting the test. We expect the ratio of general government debt (including the social security debt and government bonds for the Financial Loan Program) net of good-quality fiscal assets to GDP, to stabilize at 133% by fiscal year 2012. The major banks have been restored to good health, with the banking sector's nonperforming loans falling to 2.7% of the total portfolio as of Sept. 30, 2006."
"At the same time, Bank of Japan has successfully exited its zero interest-rate policy and massive quantitative easing by raising its policy rates by a quarter point twice to 0.5%--in July 2006 and February 2007--and by winding down its holdings of excess bank reserves. The economy is set to grow about 2% in real terms for the next few years, being twice the level achieved in the decade to 2004. In addition, we expect the GDP deflator to remain in positive territory for the forecast period," Mr. Ogawa added.
In addition to these recent developments, a strong net external-asset position and the yen's key international currency position provide the government with ample external liquidity and good access to global capital markets. Japan is the world's largest net external creditor in absolute terms with estimated net assets of US$2.0 trillion (218% of current account receipts) at the end of 2006. Its current gold and foreign exchange reserves of US$940 billion are second only to China's. Standard & Poor's expects continued current account surpluses to further enhance Japan's net external-asset position in the coming years.
In the medium term, Japan faces demographic problems similar to most OECD countries. About 70% of its ?86 trillion (17% of GDP) social security budget in fiscal 2004 was channeled to programs for the aged. The total social security budget will increase to 26% of GDP by fiscal 2025 on current trends. Although the country has successfully reformed its defined-benefit pension fund system in 2004--by extending the period before benefits are paid, increasing members' contributions, and reducing the amount of payouts--more adjustments are necessary for the long-term sustainability of the system.
The stable outlook is based on the expectation that the current government will continue its public sector reform. Faster progress than expected could improve the outlook on the sovereign ratings on Japan. Conversely, downward pressure on the ratings could arise if the government's fiscal-consolidation efforts stall.
A Japanese-language version of this media release is available on Standard & Poor's Research Online at www.researchonline.jp , or via CreditWire Japan on Bloomberg Professional at SPCJ . Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com . All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com ; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.
Media Contact:
David Wargin, New York (212) 438-1579
[email protected]
Analyst Contact:
Takahira Ogawa, Singapore (65) 6239-6342