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Japan may face debt rating cut, Moody's warns

May 30, 2011 |  9:03 pm

Bond rating firm Moody’s Investors Service formally warned Japan on Tuesday that its rating might be cut as the country sinks deeper into debt.

Moody’s said it put Japan’s Aa2 rating on review for a possible downgrade, citing in part “much larger than initially expected economic and fiscal costs of the March 11 earthquake.”

Japan-flag On Friday, Moody’s rival Fitch Ratings changed its outlook for Japan’s rating to “negative” from “stable.” Standard & Poor's cut its rating to AA-minus from AA in January, the first reduction in nine years, then warned in April that the rating could drop further.

Japan lost its Aaa top rating from Moody’s in 1998, eight years into the country’s struggle to revive its economy after the real estate and stock market crashes of the early 1990s. The rating fell to A2 in 2002 before upgrades over the last few years.

Japan’s debt has ballooned since 1990 as the government has spent massively in an attempt to jump-start growth. Now, the repair and rebuilding costs from the March earthquake, tidal wave and nuclear crisis are fueling another wave of borrowing.

From Moody’s:

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.

Yields on Japanese government bonds were little changed Tuesday. The 10-year bond yield was 1.16%, down from a 2011 high of 1.35% on Feb. 16. U.S. 10-year Treasury notes, by contrast, pay 3.07%.

Japan’s interest rates still are the lowest in the world, in large part because the government’s debt mostly is purchased by Japanese investors. Unlike the U.S., Japan isn’t dependent on foreigners to fund a significant chunk of its debt.

Still, Moody’s worries that the day will come when Japan’s own investors will be unwilling to extend more credit to their government -- something hedge fund manager Kyle Bass has been insisting is not that far off.

Japan’s “large refinancing needs introduce a susceptibility to a credit market tipping point, which could lead to an abrupt fall in [bond] prices and a rise in yields, which would in turn result in downward rating pressures,” Moody’s warned.

-- Tom Petruno

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