Moody’s Investors Service cut Japan’s credit rating, a setback to Prime Minister Shinzo Abe a day before he begins campaigning for an election that he wants to focus on the economy.
Moody’s reduced the rating for the world’s third-biggest economy one level to A1, the same as Bermuda, Israel, Oman and the Czech Republic. The yen dropped to a seven-year low, then reversed the decline, while Japanese government bonds were little changed.
The ratings company cited uncertainty over whether Japan will achieve its deficit-reduction goals and succeed in boosting growth, two weeks after Abe postponed an increase in the nation’s sales tax. The Bank of Japan is buying record amounts of JGBs issued by a government that’s already burdened by the world’s heaviest public debt load.
“This serves as a good reminder to Japanese voters that the country’s fiscal situation is terrible,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole SA. “This should push Abe to accelerate his efforts to revive the economy first and then work on fiscal consolidation. He really needs to reinvigorate the economy in a few years.”
The cut by Moody’s was the first downgrade for Japan by one of the top-three ratings companies since Abe came to power in December 2012. Moody’s had rated the country in line with South Korea, Saudi Arabia and Taiwan before today’s decision.
There are increasing risks of a rise in bond yields that could make it harder for Japan to manage its debt, according to Moody’s, even as yields on 10-year government securities hover at less than 0.5 percent.
Most of Japan’s debt is owned by domestic investors, with foreigners holding 8.54 percent at the end June, according the BOJ. The central became the biggest single creditor to the government for the first time on record in the first quarter.
The BOJ buys 8 trillion to 12 trillion yen ($101 billion) of Japanese government bonds per month, giving it room to absorb the 10 trillion yen in new bonds that the Ministry of Finance sells in the market each month.
The central bank’s bond purchases are feeding complacency in the government about its debt and preventing the market from signaling a warning through higher yields, said a former policy board member, Miyako Suda.
Abe on Nov. 18 delayed a planned 2 percentage point increase in the sales tax to April 2017 from October next year. A 3 percentage point bump to 8 percent in April helped tip Japan’s economy into its fourth recession since 2008.
BOJ Governor Haruhiko Kuroda put the onus on the government to strengthen its finances after Abe announced the postponement and set plans for more fiscal stimulus to stoke the economy.
“It’s the responsibility of parliament and the government, not an issue for the central bank,” Kuroda said. When asked how the delay would affect the growth and inflation outlook, he said: “There is no point giving my personal view.”
The BOJ and government issued a joint statement in January 2013 pledging the central bank would work toward achieving 2 percent inflation while the government was responsible for fiscal consolidation and a growth strategy.
Investors routinely ignore ratings companies’ decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody’s and S&P suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.
Standard & Poor’s has Japan at AA-, equivalent to the Aa3 level at Moody’s before the reduction. Fitch Ratings has Japan at A+, matching Moody’s.
Fitch’s Andrew Colquhoun said last month that Abe’s decision to postpone the sales tax increase was a “significant development” for Japan’s rating and that the company would complete a review of this before the end of 2014.
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