Japan Hit by Credit Downgrade

Already reeling Japan got more bad economic news as Moody’s Investment Services cut its credit rating this week amid growing debt concerns. The move, however, did not set off the panic that followed the Standard & Poor’s downgrade of the United States, perhaps because some expected a post-disaster downgrade was inevitable and perhaps because the long-term view of Japan is not negative.

Moody’s dropped Japan’s rating to Aa3 from Aa2, while issuing a “stable” outlook for the nation. It is the first downgrade for Japan by Moody’s in nearly a decade. Moody’s explained the move by discussing the large budget deficit since the 2009 global recession, partially laying the blame at the feet at the inconsistency of Japanese policy-makers, and the natural disaster’s impact on holding back the nation’s recovery:

“Over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies. The March 11 earthquake and tsunami, and the subsequent disaster at the Fukushima Daiichi Nuclear Power Station, have delayed recovery from the 2009 global recession and aggravated deflationary conditions. Prospects for economic growth are weak, making it more difficult for the government to achieve deficit reduction targets and implement its Comprehensive Tax and Social Security Reform plan.”

It was, however, noted that Japan does enjoy positive factors such as “undiminished home bias of Japanese investors and their preference for government bond” and “considerable institutional and structural strengths.”

Japan reacted swiftly today to the ratings downgrade by trying to reduce the value of the yen and with the announcement that it would release $100 billion in foreign-exchange reserves to a state run bank with the purpose of helping exporters by facilitating more overseas purchases.

Brian Shappell, NACM staff writer