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

Machinery Orders Fall in July

Yes, that's right, fall. This isn't the impression you would get from reading Bloomberg though:

Japan's machinery orders surged in July at three times the pace forecast by economists, easing concern the economy will contract for a second quarter.

Orders climbed a seasonally adjusted 17 percent to 1.12 trillion yen ($9.9 billion) from June, the Cabinet Office said in Tokyo today. The gain was led by demand for electronic machinery.

Well this isn't what the Japan Cabinet Office actually say. Here is chapter and verse:

"The total value of machinery orders received by 280 manufacturers operating in Japan fell by 0.6% in July from the previous month on a seasonally adjusted basis."

but as they also indicate:

"Private-sector machinery orders, excluding volatile ones for ships and those from electric power companies,rose a seasonally adjusted by 17.0% in July."

"

So domestic private demand is up, but the total is down (go check for yourself if you want).

The discrepancy is due to the fact, as Bloomberg themselves admit, that:

In a sign that demand outside Japan may be slowing, overseas orders fell 10.8 percent in July, the second monthly drop, today's report showed.

So the real story is that domestic demand picked up significantly, but not enough to offset the strong fall in exports. So the conclusions one would draw are quite different from those we find in Bloomberg. In fact if we look at the estimate the Cabinet Office make of anticipated orders during the third quarter, we will find it is -2.4%, ie they are actually expecting orders to be down over the second quarter, when, we will remember, the Japanese economy actually shrank. So basically, and cteris paribus, we can simply expect more of the same in Q3, and looking out globally, the downside risks on this not very optimistic forecast are quite significant, I think. Anyway, such as it is, here the relevant chart for seasonally adjusted machine orders.

Yen vs Dollar: recent trend

Here is a chart produced by Yahoo Finance of the dollar-yen exchange rate:
This would seem to reinforce Claus's assertion that the BoJ will do nothing with interest rates, as that would only exacerbate the strengthening of the yen versus the dollar. Given that the export sector is supporting Japan's GDP, Japanese officials aren't going to want to touch anything that would damage exports with a ten foot pole...

Japan Contracts in Q2

(cross-post from Alpha.Sources)

I see not reasons to mince my words on this one with the recent stark downward revision of Japanese GDP in Q2.

(From Bloomberg)

Japan's economy contracted at almost twice the pace forecast by analysts in the second quarter, reinforcing speculation the central bank will leave interest rates unchanged this year.

The economy shrank at a 1.2 percent annual rate in the three months ended June 30 as business spending slumped, the Cabinet Office said in Tokyo today. The government initially forecast a 0.5 percent expansion.

Bond yields fell to the lowest level since February last year on expectations the central bank will keep its overnight lending rate at 0.5 percent to prevent the economy from falling into recession. Any rebound in growth depends on the severity of the housing slowdown in the U.S., the biggest export market for Japanese companies including Toyota Motor Corp. and Sony Corp.

``A move by the Bank of Japan is out of the question,'' said Takehiro Sato, chief economist at Morgan Stanley Securities Japan Ltd. in Tokyo. ``A cloud is hanging over the domestic and global economy.''

And for the graphical version ...

For a general assesment of the current economic situation I recommend you to re-visit my recent notes.

Japan - The Fundamentals Linger

Still Holding at the BOJ

Small Update on Japan

Is Japan Heading for a Recession? (GEM note)

As for the immediate outlook in Japan it clearly seems evident now that whatever plans the BOJ might have had to continue normalization must now be shelved. Regarding the general annual growth estimate the current Q2 numbers will obviously weigh negatively in the overall balance. I will however be looking for somewhat of a recovery in Q3 relative to the curren q-o-q -0.3% contraction. The key as is also mirrored in the Q2 figures' steep downward revision of corporate capex will clearly be to what extent business investment will recover. As I argued in my recent GEM note (see link above) a downside has opened below industrial production especially if the US economy continues to linger in the subprime mess; something which seems very plausible at this point. In short, no de-coupling I think. Domestic consumption will likely continue to stay in positive territory but as always with Japan the positive contribution will be most modest. In the end Japan could very well be looking at a H2 which on a q-o-q basis will fair very close to stagnation.