Japan's Debt Outlook Changes from Stable to Negative

Moody's Investors Service has changed the outlook on the Government of Japan's Aa2 rating to negative from stable.


The rating action was prompted by heightened concern that economic and fiscal policies may not prove strong enough to achieve the government's deficit reduction target and contain the inexorable rise in debt, which already is well above levels in other advanced economies.


According to Moody's, the rating action does not affect the Aaa foreign currency bond and bank deposit ceilings, the outlooks for which remain stable. Nor does the rating action affect the Aaa local currency bond and bank deposit ceilings. The ceilings act as a cap on ratings that can be assigned to the domestic or foreign currency obligations of other entities domiciled in the country.


The global financial crisis has had a deep effect on Japan's economy. It has significantly raised the hurdles which policy efforts must overcome to reach the government's 2020 balanced primary budget target (excluding interest expenditure). While Japan's real GDP growth of 3.9% in 2010 may prove to be the strongest among the major advanced economies, the apparent rebound was actually weaker in nominal terms.


Nominal GDP growth was a modest 1.8% on account of chronic deflationary pressures, which were aggravated by the global financial crisis. Over the long term through to 2020, the government does not envisage growth breaking out of the 1-2% real and nominal range in its baseline, "Prudent" scenario.


Large deficits and the collapse of growth since the early 1990s have led to an overhang of government debt that is by far the largest among the major advanced economies -- whether projected at 226% of GDP by the IMF, or at 174% of GDP by the Cabinet Office for 2010 (accounting practices explain the difference). Moreover, both sources project an inexorable rise in debt over the long term under current policy and growth assumptions.




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