The government has amassed a debt of 943.8 trillion yen, about twice the GDP, and rising as it continues to sell treasury bills beyond revenues.
Moody’s said today’s decision was “prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession.”
Japan's economy is in a recession, and has contracted for three consecutive quarters, partly because of the huge damages caused by the 11 March’s earthquake and tsunami. The double natural disaster softened public investment and consumption as well as tax revenues, affecting spending plans. For the first time in many years, a rating agency cut Japan’s valuation.
The decision comes at a time when Japanese authorities are trying to counter speculation, which has pushed up the yen. Today the government announced aid for companies coping with the effects of a stronger yen, including a US$ 100 billion credit line to prompt them to invest overseas.
Japan's current government also pledged to turn its annual budget deficit into a surplus by 2020.
However, Moody's said that whilst the government may have the will to reduce the deficit, political instability in the country was hurting its plans.
In fact, "Frequent changes in the administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies," the agency said. Japan has had five different prime ministers in the last five years.
Next Monday, seven candidates will contend the Democratic Party leadership to replace current Prime Minister Naoto Kan, whose popularity plummeted over his bad management of the tsunami disaster, and especially in relation to the Fukushima nuclear power meltdown.
Power shortages have continued since the incident at the power plant. Critics have slammed power companies for their unsafe plants. At the same time, the government has called on the public to reduce power consumption but has been unable to ensure adequate supply.
Still, few expect Moody’s decision to have any major consequences for the markets because the problems are well known and its decision had been in the works since May and widely anticipated.
Many did think however that the agency’s downgrade would come after a new prime minister was picked. It thus appears to be a vote of no confidence in the capacity of the slate of candidates for the future leadership of the nation to solve its problems, i.e. the post Fukushima energy crisis, post-earthquake reconstruction, national debt and speculation against the yen.
Most of the seven DPJ candidates eyeing the top job agree Japan must eventually raise its 5 per cent sales tax to help fund the ballooning social welfare costs of its fast-ageing society.
This is Moody’s first downgrading of Japan since 2002 when it reduced the rating to A2. After that, It had upgraded Japan three times.
Moody’s rating follows that of Standard & Poor’s, which had already downgraded Japan in January.
Experts view the decision as another warning for advanced economies to control their debt. It comes in the wake of Standard & Poor’s downgrade of the United States from the top AAA rating. Moody’s also warned Italy that it might do the same given its high sovereign debt.
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