S&P downgrades Japan credit

S&P's move has added fuel to Prime Minister Yoshiro Mori's foes

By Staff and wire reports

TOKYO, Japan -- Rating agency Standard & Poor's downgraded Japan's sovereign debt rating Friday. The downgrade, to AA+ from AAA, was the first in 26 years.

The move was much anticipated, following two downgrades by the other main rating agency, Moody's.

But the blow heaped added pressure on embattled Japanese Prime Minister Yoshiro Mori.

A sovereign-debt rating is a measure of a nation's creditworthiness. S&P cited Japan's diminished fiscal flexibility, its rising debt levels, and the slow pace of fiscal reform for the rating action.

A symbolic quality

"Clearly from a political view, a public debt-rating downgrade is not a thing the government would like to see," said Stephen Long, head of Japan credit research for J.P. Morgan. "The news had a certain kind of symbolic and headline quality to it."

But Long noted that market participants expected the S&P downgrade. The market for Japanese government bonds, or JGBs, was unaffected.

Tokyo stocks in fact rose 1.32 percent Friday. Investors saw the downgrade as more motivation for the Japanese government to push through reforms and clean up bad loans in Japan's troubled banking sector.

Lack of confidence in Mori's economic policy

S&P had been expecting a sustained Japanese economic recovery. It has been clear since the second half of 2000 that was not happening, Long said.

S&P downgraded Japan's long-term and foreign sovereign debt ratings. But it left its short-term sovereign rating at A-1 Plus.

A no-confidence vote against Mori is in the works. The rating agency voiced its own lack of confidence in his economic policies.

"As everybody knows, Prime Minister Mori has been very reluctant to make concrete decisions on various key issues," said Takahira Ogawa, director of sovereign ratings for S&P.

Japan's debt now stands at 134 percent of its gross domestic product. S&P said it expects that to balloon to 165 percent of GDP by the middle of the decade.

The downgrade will undoubtedly provide ammunition to Mori's opposition. Party members of a local assembly in Chofu, western Tokyo, called Friday on Mori to step down immediately.

Reuters contributed to this report.

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Standard & Poor's

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