Friday, May 27, 2011

Japan's Ratings Outlook Now Cut To Negative

Fitch Ratings has jst announced it has revised its debt outlook for Japan from stable to negative, due to high government debt.

Japan's debt is at more than twice the value of GDP.

The agency also said that reconstruction costs from the earthquake and tsunami have raised pressure on the public purse, while the nuclear crisis has added uncertainty.

"Japan's sovereign credit worthiness is under negative pressure from rising government indebtedness,"

"A stronger fiscal consolidation strategy is necessary to buffer the sustainability of the public finances against the adverse structural trend of population ageing."

Fitch said that Japan holds the world's second-biggest foreign currency reserves of over $1 trillion, and that most debt is held domestically, "which reduces the risk of self-fulfilling panic among debt holders". However, the debt was projected to rise from 2007 to 2012 at a rate that was behind only Ireland and Iceland.

We know what happened to both countries and their banking crises.

Japan's household savings rate had been on a downtrend since the early 1990s, a trend it associated with population ageing.

Fitch says the Japanese Earthquake would add two percent of GDP to government expenditure for reconstruction this year and next.

"there is considerable downside risk for the public finances from the still-unknown cost of cleaning up the Fukushima nuclear plant, while delays in restoring power supplies could lead Fitch to revise down its 2011 growth forecast from 0.5 percent."

"There is a further risk that prolonged delays in restoring infrastructure could lead more Japanese corporates to consider relocating their activities abroad, leading to a greater permanent loss of output from the disaster, although it remains too early to gauge this effect."

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