Bangkok--14 Jan--Standard & Poor's
Standard & Poor's Ratings Services said today that it had affirmed its 'AA' long-term and 'A-1+' short-term local and foreign currency sovereign credit ratings on Japan. The outlook remains stable.
"The ratings on Japan reflect our opinion that the country has a robust net external asset position, a diversified economy, and a relatively sound financial sector," said Standard & Poor's credit analyst Takahira Ogawa. "These strengths, however, are moderated by the political gridlock in parliament, large fiscal deficits and outstanding debt, and uncertainty over the impact of a fast-aging population," Mr. Ogawa continued.
In our opinion, a strong net external asset position and the yen's importance as a key international currency provide the government with ample external liquidity and good access to global capital markets. We observe that Japan is the world's largest net external creditor in absolute terms, with a projected US$2.4 trillion (or 193% of current account receipts) in net assets at the end of 2008. Its current gold and foreign-exchange reserves of US$977 billion are second only to those of China. Standard & Poor's expects that continued current-account surpluses will further enhance Japan's net external asset position in the years to come.
As such, Japan's high savings rate, with a large accumulation of financial assets, contributes to the absorption of government debt, keeping real interest rates in check.
Despite a certain degree of dislocation in global financial markets, Japan's financial system has, in our view, remained in relatively good shape compared with its peers in the US and Europe. "Standard & Poor's does not expect large-scale bank recapitalizations by the government, notwithstanding some deterioration in bank capital ratios," Mr. Ogawa explained. This deterioration is a result of valuation losses on equity holdings and on direct investments in U.S. financial institutions.
"However, Japan's credit ratings are constrained by political gridlock in the Japanese parliament," said Mr. Ogawa. The Liberal Democratic Party-led coalition government holds a majority in the Lower House, but lost control of the Upper House in the July 2007 elections. As both of the houses have almost equal decision-making power, the parliamentary approval process has slowed and we expect it to come to a near standstill in the run up to the Lower House general election, which needs to be held by October 2009.
We observe that the political gulf separating the two parties is wide, particularly regarding the need for fiscal consolidation versus an economic stimulus package. Specific issues of contention include the plan to increase the government's share of the national pension fund contribution to 50% from the current 33% after April 1, 2009; the proposal to devolve greater tax collection responsibilities to the local government; and plans to increase the sales tax rate.
We believe that Japan's fiscal flexibility is hamstrung by the large fiscal deficits and outstanding debt. "We observe that Japan's general government deficits improved to 3.2% of GDP in fiscal 2007, ending March 31, 2008, from unsustainable levels of 8.4% of GDP in fiscal 2002. However, we project that with the economy contracting 1% year on year in calendar 2009, and with automatic fiscal stabilizers allowed to operate, the general government fiscal deficit will increase to around 5% of GDP in fiscal 2009," Mr. Ogawa said. In the medium term, if the economic growth rate rebounds reasonably soon and the government is able to enact fiscal consolidation, net general government debt would, we believe, peak at around 100% of GDP in the early part of the next decade and decline thereafter. However, if the current political stalemate continues, Japan's opportunity for orderly fiscal consolidation may be lost.
The rapidly aging population is also a challenge for the 'AA' rating on Japan. Japan's total social-security budget, which in fiscal 2004 was 17% of the total budget (4% of GDP), and of which 70% was old-age-related expenditure, is expected to increase to 26% of GDP by fiscal 2025.
"The stable outlook is based on the expectation that despite political difficulty and near-term weak growth prospects, the government will trim its deficits and reform its public sector once the global economic storm is over," Mr. Ogawa said. Downward pressure on the ratings could arise if the government's fiscal stance loosens more than we currently project and if the reform agenda is shelved. Conversely, if the government's debt burden begins to ease, upward pressure on the ratings would build.
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 Ratings in the left navigation bar, select Find a Rating.
Media Contact:
David Wargin, New York (1) 212-438-1579, [email protected]
John Piecuch, Paris (33) 1 4420-6657, [email protected]
Analyst Contacts:
Takahira Ogawa, Singapore (65) 6239-6342
Agost Benard, Singapore (65) 6239-6347
Key Contacts:
Americas Media Relations: (1) 212-438-6667
media_ [email protected]
Americas Customer Service: (1) 212-438-7280
[email protected]