Bangkok--11 Jun--Standard & Poor's Standard & Poor's Ratings Services affirmed its 'AA' long-term and 'A-1+' short-term sovereign credit ratings on Japan. The outlook remains stable. "The outlook balances Japan's considerable credit strengths with its weak fiscal position," said Standard & Poor's credit analyst Takahira Ogawa. "Japan's current political gridlock heightens uncertainty about the future course of fiscal policy and thus the government's credit trajectory." Japan's credit strengths start with its strong net external asset position and the yen's key international currency position. Japan is the world's largest net external creditor in absolute terms, with US$2.2 trillion (215% of current account receipts) in net assets at the end of 2007. Its current gold and foreign exchange reserves of US$940 billion are second only to China's. Standard & Poor's expects that continued current account surpluses will further enhance Japan's net external asset position in the coming years. Its credit strengths also include the country's developed and diversified economy. Japan's economic structure has been strengthened by the restructuring and deleveraging in the private sector as well as some deregulation by the government. The effectiveness of Japan's financial-system rehabilitation is highlighted by its having escaped relatively unscathed from credit market dislocations affecting the U.S. and Europe. In addition, the country has a highly skilled work force and is the global leader in the electronics and automotive manufacturing sectors, among others. Its weaknesses are manifest, too. "Our upgrade of the sovereign rating in April 2007 was predicated on a steady fiscal consolidation," Mr. Ogawa explained. "We expect Japan's general government deficit to fall to less than 4% of GDP in fiscal 2008, ending March 31, 2009, from 8.4% of GDP in fiscal 2002. However, the current debate over Japan's sales tax rate, local government tax authority, and the means of providing for the April 2009 increase of the government's share of the social security contribution from one-third to one-half of the total could result in Japan's current phase of fiscal consolidation coming to an end. Given Japan is unlikely to achieve primary balance in fiscal 2011 as planned, further effort by the government for fiscal consolidation is necessary. Or else its currently high ratio of net general government to GDP would rise above 100% before the middle of next decade. Fiscal loosening would lead to renewed downward pressure on Japan's ratings; conversely overperformance on the fiscal side could lead to upward pressure," Mr. Ogawa said. 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; select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search. Media Contact: David Wargin, New York (1) 212-438-1579 [email protected] Analyst Contacts: Takahira Ogawa, Singapore (65) 6239-6342 John Chambers, CFA, New York (1) 212-438-7344