Bangkok--27 Sep--Standard & Poor's Standard & Poor's Ratings Services believes that, despite the recent change in Japan's prime minister to Mr. Yasuo Fukuda, Japan still faces considerable policy risks. A report published today, entitled "Political Gridlock Could Cloud Japan's Rating Prospects", notes that the ratings on Japan are currently constrained by a high public sector debt burden, ongoing fiscal deficits, and anemic economic growth that is overly reliant on business investment and exports. "A comprehensive program of structural reforms is essential to continuing improvements in the sovereign ratings on Japan," Standard & Poor's credit analyst Takahira Ogawa said. "But policy risks present a serious challenge to improvements in Japan's economic and credit outlook." The 'AA' long-term rating on Japan is two notches below other G5 government ratings, due to the Japanese government's high general government debt burden, which is projected at 215% of GDP at fiscal year-end March 2008 on a gross basis and 102% of GDP on a net basis. Pending measures, such as raising the consumption tax rate or altering the parameters of social security, are therefore vital to improving the inter-temporal solvency of the state and the sovereign rating. Such reforms are particularly important in view of Japan's rapidly ageing population, which places additional pressure on the sovereign to rein in its general government debt burden and reduce the fiscal deficit. Mr. Ogawa noted that the LDP-led coalition still enjoys a two-thirds majority in the lower house. This means that even if the upper house votes against government-sponsored bills, the government can table the same bills in the lower house. It will then be able to enact these bills provided it secures more than two-thirds support in the second-round vote. However, the LDP's ability to govern effectively is confronted by other challenges, such as the requirement that both houses of parliament support the appointment of key official positions, such as the appointment of the Bank of Japan's governor. "Much will depend on how effectively Mr. Fukuda's government is able to execute existing policy, to make compromises with the DPJ, and, when necessary, to appeal directly to the general public," said Mr. Ogawa. "As it stands, it remains to be seen what kind of policy coordination or compromise the LDP-led government will make as long as it only holds power in the lower house and the opposition parties have control of the upper house." Regardless of how successfully the new government is in executing policy, however, there is a possibility of an early lower house election, which could come as early as the end of this year, although it is more likely to occur in 2008. We expect progress on fiscal and economic reform to be minimal during this period. Furthermore, the ratings on Japan could come under pressure if political gridlock resulted in a reversal of the government's fiscal consolidation. On the other hand, if the Fukuda government manages to regain public support and press ahead with the reform program, as did previous prime minister, Junichiro Koizumi, the ratings on Japan could be positively influenced. 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