Bangkok--13 Jul--Standard & Poor's
Standard & Poor's Ratings Services said today that stabilizing the political environment is a key challenge for Japan (AA/Negative/A-1+) to implement meaningful and sustainable fiscal consolidation following the July 11, 2010, upper house election. As a result of the election, a hung parliament is expected, as the ruling bloc failed to retain a majority of seats in the upper house of parliament. Standard & Poor's believes that a strong and stable policy base is needed for Japan to implement meaningful and sustainable fiscal consolidation, and that the latter would be an important factor in keeping the 'AA' rating on the country.
The weekend's upper house ballot was held to elect 121 seats, half of the total 242 members of parliament. The leading Democratic Party of Japan (DPJ) lost 10 seats, leaving it with 44 compared to a pre-election 54. Together with the 62 DPJ incumbents, who are not subject to reelection, and the three seats held by the junior coalition party, the National New Party (NNP), the coalition won a total of 109 seats, leaving it short of a majority.
As a result, a hung parliament is the most likely outcome, as leaders of opposition parties are rejecting the possibility of joining the coalition. A hung parliament would make it very difficult for the government to push through major policies, as the coalition does not enjoy a two-thirds majority in the lower house. (Even if government sponsored bills are rejected by the upper house, the government can ratify bills in the lower house by holding a second vote, but this requires a two-thirds majority in the lower house). As such, structural reforms, including those of the public sector and public pension system, and increases in the consumption tax rate will be difficult to implement in the new political landscape, and thus, potentially act as a negative factor on the sovereign ratings.
Moreover, the DPJ is scheduled to hold a party leader election in September 2010, which could also affect government policies. Although Prime Minister Naoto Kan expressed his determination not to resign after the election, he may be pressured to change the current leadership to take responsibility for the election outcome, and this could destabilize the leadership of the DPJ as well as the government.
From a sovereign ratings perspective, effective policy measures to increase revenue and reduce expenditure to achieve fiscal consolidation are key to maintaining the current ratings on Japan. Overall, Standard & Poor's sees many Japanese political parties and politicians as lacking a sense of urgency with regards to fiscal consolidation. As a result, it remains uncertain whether the goal of achieving a primary balance within the next decade, as the government announced in June 2010, will be enough to retain market confidence and prevent Japan from falling into a sovereign crisis. Market confidence is also dependant on factors such as the condition of the domestic and global economy, the financial markets, and the status of inflation (or deflation). Generally speaking, the longer the government delays decisive action on fiscal consolidation, the greater the potential risk of losing market confidence.
The sovereign ratings on Japan are supported by its strong net external asset position, relatively strong financial system, and diversified economy. These strengths are moderated by the country's large fiscal deficits and outstanding debt, and an unwieldy political setting that is likely to further delay fiscal consolidation and structural reforms.
If the fiscal position of the government erodes further, or there is a lack of concrete measures aimed at fiscal consolidation, we may lower the sovereign ratings on Japan. On the other hand, we would consider revising the outlook to stable if the government consolidates its political foundations and takes concrete measures for fiscal consolidation.
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 .
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