Standard & Poor’s Corp. on Monday reaffirmed Japan’s sovereign-debt rating at double-A-minus and maintained its negative outlook, a move that leaves prime minister Yoshihiko Noda under pressure to deliver on tax increases to improve the country’s dire fiscal position.
“The sovereign ratings on Japan are supported by the country’s ample net external asset position, relatively strong financial system and diversified economy,” S&P said in a statement. “In addition, the yen is a key international reserve currency.”
It also maintained the short-term rating at A1-plus.
“That is indeed positive news, because any further downgrades will have negative impact on the JGB market,” said UBS Securities Senior Strategist Atsushi Ito.
Still, noting the considerable challenges facing the Noda government, S&P said the rating continues to carry a negative outlook. It cited the litany of problems facing Japan, including “the government’s weak policy foundations, large fiscal deficits and high debt, as well as prolonged deflation and an aging and shrinking work force.”
S&P’s action comes as the government faces a tough struggle to win approval for a proposed increase in the national sales tax to help cover rising social welfare costs as the population ages. The government is pushing for an increase in the consumption tax from the current 5 percent, with a two-stage rise to 8 percent and then 10 percent by 2015.
But given Japan’s dire fiscal state, even a doubling of the tax will leave large deficits. Its gross debt burden is more than 200 percent of annual gross domestic product, and one-half of the government’s budgeted spending comes from fresh borrowing.
The country’s finance ministry acknowledged in a report on January 30 that even with the higher tax, debt issuance won’t fall and could continue to rise.
The central government would need to sell new bonds worth JPY 45.4 trillion ($570.6 billion) in the fiscal year starting April 2015, should it take no other policy steps in addition to raising the 5 percent consumption tax to 10 percent by October 2015 and other measures already promised, according to three-year estimates released by the ministry.
Passage of the tax measure is in doubt. The main opposition party has vowed to block the enactment of the sales-tax increase, even though it has endorsed the idea of a higher sales tax.
Concerns over the debt burden have been growing, with the IMF and the Bank of Japan saying such deficits can’t continue indefinitely. The IMF said in a November report to the Group of 20 industrial and developing nations that Japan’s debt “is on an unsustainable path, carrying risks to domestic and global stability.”
Any downgrade also could make the government’s finances more precarious because lower-rated securities typically command higher rates of interest. Even at current low rates of about 1 percent for 10-year government bonds, debt-servicing costs for the fiscal year starting April 1 are expected to total 24.3 percent of the total budget of JPY 90.33 trillion.
All of the three major international credit-rating agencies currently rate Japan’s sovereign debt at the same level. Moody’s Investors Service issued a downgrade to Aa3 in August, the same level as held by Fitch Ratings at double-A-minus. -By William Sposato and Megumi Fujikawa