Moody's warns on risks to Japan’s creditworthiness

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Moody’s Investors Service has warned Japan that the factors supporting its Aa3 credit rating face challenges in the years ahead.

In August, the ratings agency downgraded the Japanese government from Aa2 because of the increase in budget deficit and debt that has built up since the 2008 financial crisis.

The organisation’s latest analysis of the country says the factors supporting its current Aa3 rating and stable outlook, such as the ability to finance debt at low cost, its large pool of domestic savings and the low level of leverage outside of the public sector, remain “strong”.

However, Moody’s lists a number of problems that could present risks to the country’s creditworthiness if they worsen further.

“Frequent changes in prime ministers since 2006 have impeded the economic and fiscal reforms needed to boost growth and contain debt, while the March 11 earthquake and nuclear power plant disaster have delayed recovery from the 2009 global recession and aggravated deflation,” the report explains.

Furthermore, the analysis warns that a funding crisis for Japanese government bonds, which could be created if the home bias in its financing diminishes, is the country’s greatest threat. Although the agency does not see this occurring in the near term, it adds that “pressures could build up over the longer term”.

It also points out that Japan’s policies and growth trends are not containing its growing government debt. This problem was exacerbated by the March 11 earthquake, which damaged both the short- and long-term outlook.


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