Moody's cuts Japan's debt rating on deficit concerns

Devastated Kesennuma city in Miyagi prefecture The earthquake and tsunami caused widespread destruction to Japan's north-east coast

Rating agency Moody's has cut Japan's long-term sovereign debt rating, citing concerns about the size of the country's deficit and borrowing levels.

The rating was cut to Aa3 from Aa2, though Moody's also said the country's outlook was stable.

Japan, the world's third-largest economy, has the highest public-debt level amongst developed economies.

The 2009 global financial crisis, and this year's earthquake and tsunami have increased the pressure on its finances.

"The rating downgrade is prompted by the large budget deficits and the build-up in Japanese government debt since the 2009 global recession," Moody's said in its statement.

"The March earthquake also undermined Japan's recovery from the 2009 global recession," it added.

Difficult times

Japan's economy is currently in a recession, and has contracted for three consecutive quarters.

According to the latest government figures, Japan's economy shrank by an annualised rate of 1.3% in the three months to the end of June. It shrank 0.3% from the previous quarter.

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Frequent changes in the administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies”

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While that figure was better than many analysts had expected, there are concerns about the increased levels of borrowing and spending that Japan will have to undertake to rebuild after the tsunami.

Not least because the devastation caused by the natural disasters has seen consumer and corporate spending in Japan soften. With consumers and companies spending less, the government is set to earn fewer yen in tax revenues, further impacting their budget plans.

At the same time, Moody's warned that power problems may cap the ability of the economy to rebound quickly.

Japan's electricity production has been compromised by the crisis at the Fukushima Daiichi nuclear power plant, which was damaged by the earthquake and tsunami. The government has cut the country's nuclear power output and is asking people to limit their use of electricity.

The fear is that continuing uncertainty about the supply of power will deter or delay investment by both the public and private sectors.

"These developments further hamper the economy's ability to achieve a growth rate strong enough to steadily reduce the budget deficit," Moody's said.

Political will?

Japan's current government has pledged to turn its annual budget deficit into a surplus by 2020.

However, Moody's said that while the government may have the will to reduce the deficit, political instability in the country was hurting its plans.

Japan has seen five different prime ministers in the last five years.

"Frequent changes in the administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies," the agency said.

To make matters worse, the current prime minister, Naoto Kan, is expected to resign within the next few days.

"The imminent change in the party's presidency and the election of a new prime minister reflect the factious nature of the country's politics," Moody's warned.

Analysts said that Moody's decision to cut the debt rating may have been triggered in part by the change in leadership.

"Looking at the candidates, there seems to be nobody among them who would seriously tackle financial reform, so that's why Moody's went ahead and cut the rating," said Yuuki Sakurai of Fukoku Capital Management Inc in Tokyo.

"Moody's probably has the view that Japan's finances will continue worsening," he added.

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