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Wednesday, September 12, 2007

The Ratings Agencies and Japan Government Debt

As explained here, with outstanding Japan government debt variously estimated to be somewhere in the region of 150% of GDP, and structural liabilities growing as Japan's population ages rapidly, the fiscal situation in Japan has to be a matter of growing concern. In particular given the recent severe criticism that has been leveled against the ratings agencies, we can increasingly expect them to be anything but generous in the way they handle those with extreme problems in this area like Italy and Japan.

Fitch Ratings ruled out an upgrade to Japan's investment-grade credit ratings because of concern about the nation's ``extraordinarily high'' debt burden.

Japan needs to make difficult decisions about its budget, said James McCormack, head of Asia sovereign ratings for Fitch, following the resignation of Prime Minister Shinzo Abe.

``The government has to raise taxes and cut spending, and it is difficult for a weak government to do either,'' McCormack said, speaking by phone from Beijing. ``The timing of Abe's resignation is odd, although the actual resignation is not.''

Japan's yen-denominated notes carry Fitch's fourth-highest ranking of AA- and the foreign-currency debt is one level higher at AA. The nation has the most public debt in the world, estimated by the Ministry of Finance to reach the equivalent of $6.8 trillion by March 2008.

Abe, 52, said at a news conference today that it had become difficult to win public support for policies and that a successor will be decided soon. Party officials said a leadership election will take place on Sept. 19.

Calls for his resignation intensified after the ruling Liberal Democratic Party lost control of the Upper House in July. His approval rating dropped below 30 percent after four ministers resigned and one committed suicide because of financial irregularities, inappropriate remarks and a pension-fund scandal.

``Difficult political decisions on fiscal issues have to be made and they don't look like they are going to happen soon,'' Fitch's McCormack said.

Standard & Poor's

``The reputation of the LDP is not going to be very good whoever the new prime minister will be,'' Takahira Ogawa, credit analyst with Standard & Poor's, said in an interview from Tokyo. ``Abe's resignation is really symbolic of the unpredictability of the government.''

Ogawa declined to comment on whether S&P is inclined to change Japan's credit rating. The company ranks the country's local-currency debt at AA, the third highest.

The government needs to promote a ``more flexible and more competitive'' economic system to boost growth and tax revenues, he said.
Source: Bloomberg