Moody's downgrades Japan's credit rating (AP)

By TOMOKO A. HOSAKA, Associated Press Tomoko A. Hosaka, Associated Press – Wed Aug 24, 2:56 am ET

TOKYO – Moody's downgraded Japan's credit rating, citing the country's weak growth prospects, massive government debt and constant political uncertainty.

The cut in Japan's government bond rating Wednesday to Aa3 from Aa2 puts the country three notches below Moody's top Aaa rating. Moody's Investors Service said the outlook for the rating is stable.

The rating cut comes ahead of another leadership shuffle in Japan. With his popularity sinking, Prime Minister Naoto Kan and his Cabinet are preparing to resign next week. That would set the stage for a leadership election within the ruling party and a new prime minister — Japan's sixth in four years.

Frequent administration changes have prevented Japan's government from adopting effective long-term economic and fiscal policies, Moody's said.

Kan has been criticized for lacking leadership after the March 11 earthquake and tsunami and subsequent nuclear crisis, and survivors of the disasters complain of slow relief and recovery efforts. Polls show his approval rating is below 20 percent.

The country's economic problems are compounded by the natural disaster and the ongoing nuclear crisis. Japan's ballooning debt is now twice the size of the country's gross domestic product.

"These developments further hamper the economy's ability to achieve a growth rate strong enough to steadily reduce the budget deficit," Moody's said.

The downgrade puts Moody's Japan rating in line with other major agencies. Both Standard & Poor's and Fitch rate Japan AA-, three notches below their top AAA ratings.

In May, Moody's warned it could downgrade Japan after the world's No. 3 economy slipped back into recession in the first quarter due to tumbling output and exports following the March 11 earthquake and tsunami.

Moody's has maintained its AAA rating on the United States while Standard & Poor's earlier this month took the unprecedented step of downgrading the U.S., blaming large deficits and political gridlock.

The decision compounded worries about the fiscal health of the world's biggest economies and unnerved already volatile financial markets.

Reaction to Japan's rating cut Wednesday was more muted. Analysts described the move as hardly a surprise, and bond markets remained calm.

Noriatsu Tanji, a fixed income strategist at Barclays Capital in Tokyo, said that unlike the U.S., a rating cut is not new territory for Japan. At one point in 2002, Moody's had dropped its assessment on Japan to as low as A2 before gradually upgrading it starting 2007.

"The latest downgrade puts Japan's rating at a level it has already seen before," he said in a research note.

Japanese government bonds have historically weathered rating cuts without sharp drops. Unlike the U.S., the vast majority of the Japan's public debt is owned domestically.

Even as it downgraded its view on Japan, Moody's highlighted the country's large economy and dependable domestic funding base that enables the government to fund itself "at a lower nominal cost than any other advanced economy."

"Furthermore, throughout the global financial crisis, in the months after the March earthquake, and in recent days with renewed turmoil in global markets, (Japanese government bonds) continue to demonstrate exceptionally strong safe-haven features," it said.

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Moody's cuts Japan rating, blames politics (Reuters)

TOKYO (Reuters) – Moody's Investors Service cut its rating on Japan's government debt by one notch to Aa3 on Wednesday, blaming a build-up of debt since the 2009 global recession and revolving-door political leadership that has hampered effective economic strategies.

Japan is preparing to elect its sixth leader in five years to replace unpopular Prime Minister Naoto Kan, under fire for his handling of the response to a March tsunami and subsequent radiation crisis at a crippled nuclear power plant.

The downgrade, while not out of the blue, served as another reminder of the debt burdens that nearly all of the world's major advanced economies shoulder, even as policymakers struggle to agree on ways to stimulate sub-par growth without massive new spending.

The United States lost its top-tier AAA rating from Standard & Poor's earlier this month, and Moody's warned in June that it may downgrade Italy as Europe's sovereign debt crisis festers.

Moody's new rating on Japan's debt is three notches below coveted AAA status, which Tokyo lost in 1998, but is still classified as high grade. Japan is now the same level as China, which surpassed it last year to become the world's second-largest economy, and one notch below Italy and Spain.

"Over the past five years, frequent changes in (Japan's) administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies," Moody's said.

Moody's had warned in May that it might downgrade Japan's Aa2 rating due to heightened concerns about faltering growth prospects and a weak policy response to rein in bulging public debt, already twice the size of its $5 trillion economy.

Finance Minister Yoshihiko Noda, a fiscal conservative who has joined the race to succeed Kan, refrained from direct comment on Moody's downgrade. But he said: "Recent JGB auctions have met favorable demand and I don't see any change in market confidence in JGBs."

Analysts said the downgrade was hardly a surprise and the reaction in financial markets was muted.

"I had expected that the rating cut would have taken place after the election for the leadership of the (ruling) Democratic Party of Japan. But looking at the candidates, there seems to be nobody among them who would seriously tackle financial reform, so that's why Moody's went ahead and cut the rating," said Yuuki Sakurai, CEO and president of Fukoku Capital Management Inc.

The risks of an upgrade and a downgrade are equally balanced but it would take a significant development to get the ratings agency to move in either direction, Tom Byrne, Moody's senior vice president and regional credit officer , told reporters.

An earlier agreement to raise taxes to cover welfare costs was a good start at fiscal consolidation, but the best chance for success is a stable government, Byrne added.

Japan's next leader has a mountain of challenges ahead, from battling a soaring yen and forging a post-nuclear crisis energy policy to rebuilding from the tsunami and reining in public debt, while paying for reconstruction and the bulging costs of an aging society.

The March disasters knocked the economy back into recession, and the strength of an expected rebound later this year is being clouded by weak domestic and global demand and recent gains in the yen, which threaten export competitiveness.

The government on Thursday unveiled steps to help firms cope with the yen's recent rise to record highs, including a $100 billion emergency credit facility aimed at making it easier for Japanese companies to buy foreign firms.

It also said it would ask major financial firms to report on dealers' currency positions for the period to the end of September, an apparent attempt to curb speculation.

"We are watching more carefully than before whether there is any speculative activity in the market. We won't exclude any options and will take decisive action when necessary," Noda told a news conference to announce the government measures.

Noda's chances of winning an August 29 ruling party leadership race to pick Kan's successor dimmed this week after former Foreign Minister Seiji Maehara, who says beating deflation should be the top priority, reversed course and decided to run.

TAX HIKES AND TIMING

Most of the seven DPJ candidates eyeing the top job agree Japan must eventually raise its 5 percent sales tax to help fund the ballooning social welfare costs of its fast-aging society.

Only Noda, however, favors raising other taxes soon to fund reconstruction of Japan's tsunami-devastated northeast region, and even he has been toning down that stance lately.

"While most people in the market believe Maehara is very likely to win the election, a swift policy response on debt problems is unlikely to come out soon," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

Moody's said Japan needed to achieve 3 percent nominal growth in its gross domestic product to get the deficit under control and that a government plan to double the 5 percent sales tax by mid-decades was not bold enough.

"That's not enough. The government knows that as well," Byrne told Reuters.

The yen barely moved on the downgrade news, trading at around 76.7 to the dollar, while 10-year JGB futures were up 0.08 point at 142.63 at the end of the morning session after initially dipping into negative territory. Japanese stocks fell about 1 percent.

Moody's said the outlook for Japan's credit rating was now stable given the "undiminished home bias of Japanese investors and their preference for government bonds, which allows the government's fiscal deficits to be funded at the lowest nominal rates globally".

Byrne told Reuters that as a rule, the rating was not expected to change for 12 to 18 months.

The downgrade brings Moody's rating for Japan into line with rival agency Standard & Poor's, which cut Japan's rating in January to AA minus, the fourth-highest on its scale.

Moody's downgrade of Japan was its first since 2002, when it reduced the rating to A2, six notches from the top. It had upgraded Japan three times since then, with the last upgrade as recent as May 2009.

Persistent deflation and slow growth has shackled Japan's economy for years, reducing tax revenues available to the government, which has grown to rely on debt issuance to finance a large part of its budget.

(Additional reporting by Wayne Cole in Sydney and Nathan Layne, Chikafumi Hodo and Tetsushi Kajimoto in Tokyo; Writing by Linda Sieg; Editing by Kim Coghill)

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Moody's downgrades Japan's debt rating (AP)

NEW YORK – Moody's Investors Service on Tuesday downgraded its rating on Japan's debt.

The agency said it lowered the rating because of Japan's large budget deficits and growing government debt.

Moody's cut Japan's government bond rating to Aa3 from Aa2. The new rating is three notches below Moody's top Aaa rating. It said the outlook for the rating is stable.

The downgrade puts Moody's Japan rating in line with other major agencies. Both Standard & Poor's and Fitch rate Japan AA-, three notches below their top AAA ratings.

In May, Moody's warned it could downgrade Japan after the world's No. 3 economy slipped back into recession in the first quarter due to tumbling output and exports following the March 11 earthquake and tsunami.

Frequent administration changes have prevented Japan's government from adopting effective long-term economic and fiscal policies, Moody's said. The country's economic problems were compounded by the natural disaster and the subsequent nuclear crisis.

"These developments further hamper the economy's ability to achieve a growth rate strong enough to steadily reduce the budget deficit," Moody's said.

Moody's has maintained its AAA rating on the United States. Standard & Poor's earlier this month took the unprecedented step of downgrading the U.S., citing its large deficits and political gridlock.

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