Moody’s downgrades Japan due to ‘third arrow’ doubts

Moody’s has downgraded Japan one notch to A1 citing doubt about the timing and effectiveness of its monetary stimulus and uncertainty of reducing its deficit.

Those uncertainties boost the likelihood of higher yields, which would in turn tighten the screws on the already heavily indebted eastern nation.

The IMF projects Japan’s sovereign debt is projected to hit 245 per cent of GDP this year. Moody’s says that debt ratio will start to drop only with an aligning of fiscal and economic stars including tax and social security reform, boosted productivity, slain deflation and nominal growth of 3.5 per cent.

“The second driver for the downgrade is the rising uncertainty over the government’s ability to enhance medium term growth through structural economic reform – the third ‘arrow’ of Abenomics – success in which will be crucial to achieve fiscal consolidation,” Moody’s says.

“While some indicators suggest a pick-up in economic activity over the past year, potential economic growth remains low.”

Formerly rated Aa3, Japan’s outlook is stable at the new rating and the change does not apply to its Aaa currency and bank deposit ceilings, Moody’s says.

The eastern giant has a large diversified economy with a strong export position, robust institution and a strong domestic tax base.

“The stable outlook reflects the broad balance between upside risks including significant fiscal consolidation and a resumption of economic growth, and downside risks including intensification of deflationary pressures and loss in economic momentum,” Moody’s explains.

The consumption tax hike in April has eclipsed the boost of Japan’s titanic monetary expansion, the agency says.

While Japan’s retreat from a planned second tax increase has “merit”, it also makes halving the primary deficit – excluding interest payments – by next year more unlikely. Achieving a budget surplus by 2020 is “even more challenging”, Moody’s adds.

In October the Bank of Japan surprised markets with a bold increase of its bond-buying programme to Y60trn to Y70trn (£539bn to £629bn), however it has since been revealed that board members were split on the decision.