Moody's cuts Japan credit rating again


The yen eased, then quickly rallied after the Moody's announcement

Staff and wires

TOKYO, Japan -- Moody's Investors Service cut Japan's long-term credit rating by a surprising two notches Friday, citing debt levels unprecedented in the postwar era in the developed world.

Japan's public debt will likely be more than 140 percent of gross domestic product by next March -- more than double that of the United States.

But Japan also has the world's largest foreign reserves and is the world's largest creditor.

According to the Ministry of Finance, its reserves totaled $406.7 billion at the end of April. About $391 billion of this is in foreign exchange.

Moody's cut Japan's local currency rating to A2 from Aa3 but kept its long-term foreign currency debt rating at Aa1. It said the outlook for both ratings was stable.

Among the lowest


Increasing exports to the U.S. of cars such as Honda's NSX are helping the Japanese economy

The local currency rating was already the lowest among major industrialized nations after an upgrading of Italy to Aa2.

Nikko Salomon Smith Barney's Jeffrey Young told CNN Friday that the Japanese government's structural reforms were neither deep enough nor rapid enough to bring down the country's debt levels.

Speaking before Moody's announced its action, Young said the impact of a downgrade was hard to divine.

Japan was not yet seeing capital flight, but investors were making efforts to diversify, he said.

Moody's said the risk of a financial crisis was remote because of the "essentially closed nature of the Japanese financial system."

Still, Moody's two-notch cut is a setback for the government, which says the world's second largest economy is being treated unfairly by rating agencies.

Government dismissive

Finance Minister Masajuro Shiokawa was dismissive of Moody's decision. "They're doing it for business. Just because they do such things we won't change our policies," Reuters news agency reported him as saying.

"The market doesn't seem to be paying attention," he said.

The yen initially fell but quickly rallied as the market refocused on worries about the U.S. economy. It was quoted at 123.15/20 per dollar versus 123.25 before Moody's announcement.

Stocks eased from their slight gains earlier in the day, with the Nikkei 225 ending just 0.05 percent lower at 11,763.70.

Government bonds also proved resilient, with traders saying the market was relieved the long-awaited event was now out of the way.

Market analysts and economists said it was unlikely there would be significant market impact.

Japan has largely been immune to repeated cuts in its credit standing because its debt is entirely denominated in yen and is mostly owed to domestic investors.

Debt position deteriorating

"I think the biggest issue from this downgrade will be trust in Moody's as a ratings agency," Takuji Aida, fixed income strategist at Merrill Lynch, told Reuters news agency.

Moody's said its decision "reflects the conclusion that the Japanese government's current and anticipated economic policies will be insufficient to prevent continued deterioration in Japan's domestic debt position."

According to Moody's, Japan now ranks with Cyprus, Greece, Israel, Latvia, Poland and South Africa in the same "upper medium" local rating.

The decision to downgrade comes when it appears Japan's economy is bottoming out after three quarters of decline, thanks to a rise in exports of cars and consumer electronics into the recovering U.S. economy.

But Moody's said the downgrade of the local-currency bond rating reflected its conclusion that the government's current and anticipated economic policies would be insufficient to prevent continued deterioration in Japan's domestic debt position.

"Japan's general government indebtedness, however measured, will approach levels unprecedented in the postwar era in the developed world, and as such Japan will be entering 'uncharted territory'," the ratings agency said.