Moody's adds to pressure on Japan


Japanese Prime Minister Koizumi's biggest challenge is to fight deflation, ratings agency Moody's said Wednesday

CNN's Geoff Hiscock||Asia business editor

TOKYO, Japan (CNN) -- Japan's Prime Minister Junichiro Koizumi is bracing for difficult times as he weighs a fall in his popularity, a possible credit rating downgrade and the likelihood of tough economic talk when he meets U.S. president George W. Bush in Tokyo next week.

U.S. credit rating agency Moody's Investors Service said Wednesday it would review for possible downgrade the Aa3 rating of yen-denominated domestic securities issued or guaranteed by the Japanese government.

It cited concerns about the impact of deflation on the economy.

Finance Minister Masajuro Shiokawa immediately said he was unhappy with the Moody's warning.

"It's regrettable," he told reporters, according to Reuters news agency.

Host of challenges

Japan, the world's second largest economy, faces a host of challenges as it struggles to break free of a recession that will see gross domestic product shrink by about 1 percent this year.

Its problems include billions of dollars of bad bank loans, lackluster consumer demand, a record jobless rate and the specter of an uncontrolled deflationary spiral.

Moody's identified deflation as the "foremost challenge" facing Japan, saying it exacerbated credit risks throughout the economy as debt rose in real terms.

The longer it took the Japanese government to fashion an effective policy response to deflation, the more complicated solving other economic problems would become, it said.

Prime Minister Koizumi, who will host President Bush's visit to Japan next week, on Tuesday ordered the Council on Economic and Fiscal Policy to begin "full discussions" on anti-deflation measures, Kyodo news agency reported.

Koizumi's economic ministers are scheduled to meet late Wednesday to discuss the fight against deflation, according to Japanese media reports.

The Yomiuri newspaper said Koizumi wanted to explain his anti-deflation policy to Bush during his visit.

Popularity slipping

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But Koizumi's ability to deliver the structural reforms that he promised when he came to power in April last year is under a cloud.

Although his pledge to overthrow vested political and business interests as part of his reforms has been hugely popular with the Japanese public, confidence in him may be on the wane.

An opinion poll by the Nihon Keizai Shimbun business daily on Wednesday showed that about 60 percent of voters think Koizumi will be unable to carry out his reform agenda. Just 33 percent think he can.

According to the Nihon Keizai, Koizumi's overall support rating is now 55 percent, down sharply from 78 percent in the newspaper's November poll.

Many conservatives in the ruling Liberal Democratic Party want Koizumi to delay structural reform and get the economy moving first.

Economic observers such as IMA Asia's Richard Martin believe that substantial changes are no longer possible in the current political climate.

Martin told CNN that Koizumi's window of opportunity was now virtually gone. In this situation, Japan should put reform aside and aim for a recovery based on exchange rates, liquidity and holding the line on budget spending.

But he said the downside of this recovery approach was that it did not equal a long-term fix of the economy.

Last Friday, Japan's central bank surprisingly left its monetary policy unchanged, resisting pressure to pump liquidity into the sluggish economy.

U.S. wants action

Japan is also under scrutiny from key trading partners, including the United States, who are urging it to take decisive action.

Kyodo reported Wednesday comments by White House Council of Economic Advisors chairman Glen Hubbard that it would be a mistake for Japan to try to revive its economy through exports backed by the yen's weakness, instead of by promoting structural reform.

"There's no way Japan can export itself out of its problem without fixing the non-performing assets and changing the monetary policy," Hubbard said in an interview with Japanese media in Washington.

Moody's, which last cut Japan's debt rating in December, said Wednesday the stable outlook on Japan's Aa1 foreign currency country ceilings, as well as the government's Aa1 rating for internationally issued bonds, was unaffected by its review.