Japan’s debt rating was put on review for a downgrade by Moody’s Investors Service, adding to Prime Minister Naoto Kan’s fiscal challenges after an increase in joblessness and smaller-than-forecast gain in factory production.
Faltering growth prospects and “a weak policy response” may hinder government efforts to cut the nation’s debt burden, said Moody’s, which had put Japan’s Aa2 rating on negative outlook in February. Government reports showed separately that output rose 1 percent in April, half the median estimate in a Bloomberg News survey, while unemployment rose to 4.7 percent from 4.6 percent.
Kan, facing a no-confidence motion in parliament, said today he won’t step down, signaling continued political infighting that may hamper legislation to finance long-term reconstruction after the March earthquake and tsunami. Japan, which has the world’s biggest public debt, saw its currency retreat for a second day against the dollar and bonds fall.
“This means we’re one step closer to a downgrade, and it reflects how we haven’t seen any political progress on fixing public finances,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “There are still plenty of people in the JGB market to keep buying, so it’s not like we’re going to see a sudden spike in yields. But this will put upward pressure on yields through an added risk premium.”
Most credit rating reviews result in a downgrade, and Japan’s will likely be completed in three months, Thomas Byrne, senior vice president at Moody’s, told reporters in Tokyo today. He also said that the possibility of more than a one-notch rating reduction was “low.”
Japanese government bonds fell for the first time in three sessions, with benchmark 10-year securities yielding 1.15 percent as of 3:10 p.m. The yen weakened to 81.45 per dollar. TheNikkei 225 (NKY) Stock Average gained 2 percent to 9,693.73 on manufacturers’ forecasts that production will accelerate.
The companies said they plan to boost output 8 percent this month and 7.7 percent in June, according to today’s report.
The Moody’s step comes four days after Fitch Ratings lowered the outlook to negative on its AA- long-term local currency rating for Japan. Standard & Poor’s cut its outlook on the AA- grade in April after lowering the rating in January. The current grade at Moody’s, the third-highest, is one step higher than S&P and Fitch.
Moody’s said it’s concerned at the government’s ability to “fashion and achieve a credible deficit reduction target.”
Japan’s government debt is projected to reach 219 percent of gross domestic product next year, the Organization for Economic Cooperation and Development estimates, a burden that may be exacerbated by efforts to rebuild the nation after a record March 11 temblor. Kan, facing declining approval ratings and a recession, hasn’t indicated how he plans to cut deficits in an economy plagued by deflation and a shrinking population.
“Rating agencies are very concerned whether fiscal discipline will be maintained or not,” said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research in Tokyo. “The government should raise the sales tax by around 2015. Otherwise, Japan’s public debt will likely become unsustainable.”
Moody’s said it’s concerned at the government’s ability to “fashion and achieve a credible deficit reduction target.”
Japan’s government debt is projected to reach 219 percent of gross domestic product next year, the Organization for Economic Cooperation and Development estimates, a burden that may be exacerbated by efforts to rebuild the nation after a record March 11 temblor. Kan, facing declining approval ratings and a recession, hasn’t indicated how he plans to cut deficits in an economy plagued by deflation and a shrinking population.
The gain in industrial output, after a record decline in March, missed the 2 percent median estimate of 30 economists surveyed by Bloomberg News. The jobless rate advanced from 4.6 percent as payrolls fell, a separate report showed.
Disruptions caused by the quake have had an impact beyond Japan, with South Korea reporting today that industrial output expanded at the slowest pace in seven months in April.
South Korea’s industrial output climbed a less-than- expected 6.9 percent from a year earlier last month and in Singapore, production fell a sharper-than-expected 9.5 percent from a year earlier in April.
Japan’s economy shrank at an annual 3.7 percent pace in the first quarter and analysts surveyed by Bloomberg News expect a slump of 2.5 percent in the three months ending June, extending a contraction that began in the final three months of 2010.
Wages fell 1.4 percent in April from a year earlier, a separate government report showed today, the biggest drop since December 2009. The job-to-applicants ratio deteriorated to 0.61 from 0.63, an indication that there are 61 positions available for every 100 applicants.
Overseas sales decreased 12.5 percent in April from a year earlier, the biggest drop since October 2009, evidence that companies are still struggling to produce and ship goods to meet overseas demand. The value of automobile exports plunged to its second lowest level since data began in 1979, the Finance Ministry said.
Nissan Motor Co. Chief Executive Officer Carlos Ghosn said on May 17 that the automaker plans to invest 3 billion yen to reinforce the foundation of its most heavily damaged domestic factory after the earthquake in northern Japan disrupted output.
Rival Honda Motor Co., Japan’s third-largest automaker, said on May 17 that it will return to normal production before the end of the year. Toyota Motor Corp. expects production to normalize by November or December.
Kan plans to come up with second extra budget for reconstruction after parliament approved a 4 trillion yen ($50 billion) package this month. He needs the cooperation of opposition politicians to get the budget enacted. The government in March estimated that damage from the disaster will swell to as high as 25 trillion yen.
Moody’s said Japan will spend about 2 percent of GDP for reconstruction, excluding costs that arise from helping Tokyo Electric Power Co. pay for the Fukushima nuclear accident.
“The inexorable rise in government debt suggests that actions are urgently needed to regain a path of fiscal consolidation,” Moody’s said. “The government’s large refinancing needs introduce a susceptibility to a credit market tipping point, which could lead to an abrupt fall in JGB prices and a rise in yields.”
