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Japan Takes Unexpected Ratings Knock from Fitch over ‘Leisurely’ Behavior

In line with a March Business Credit Magazine article outlining the vast troubles facing Japan, Fitch Ratings sent a definite message that it believes the Japanese should be moving at a faster pace in addressing its growing debt concerns this week.

Concerns over Japanese debt and growth -- as noted by experts like Adolfo Laurenti, deputy chief economist at Mesirow Financial; Masaaki Kanno, of JPMorgan Security Japan Co.; and NACM Economist Chris Kuehl in Business Credit, eased slightly as a surge in the trade surplus was recorded just before the end of March. But this week’s Fitch downgrade has put Japan back into prominence in the world media in the most dubious of ways…at least for those who still value such analysis from U.S.-based ratings agencies that have faced much criticism in recent months and years.

Fitch downgraded Japan's long-term foreign and local currency issuer default ratings to 'A+' from 'AA' and 'AA-,' respectively. They are the lowest ratings for the nation out of the big three raters, which also includes Standard & Poor’s and Moody’s Investment Services.  The firm also listed both outlooks as “negative.”

“The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios," said Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch. "The country's fiscal consolidation plan looks leisurely relative even to other fiscally-challenged, high-income countries, and implementation is subject to political risk." Fitch added that Japan's gross government debt is projected to approach 250% of GDP by early 2013, “by far” the highest of any developed economic power.  
Endemic issues Japan is facing include the following:

  • One word: debt…the debt-to-GDP ratio presently exceeding 200% is nothing short of astonishing.
  • The nation must figure out how to address energy needs, especially with an expected, perhaps unavoidable movement away from nuclear power, at least in the short-term.
  • The export sector faces massive disadvantages compared to other regional nations’ manufacturing sectors, especially China, because of Japan's overly high, even troublesome, value of its currency (the yen) as investors continue to remove money from the euro.

Brian Shappell, CBA, NACM staff writer