Japan's recovery takes hold

Japan's economy offered more signs of recovery from the deadly March earthquake on Tuesday, but Moody's ratings agency warned both growth and government action may fall short of what is necessary to bring Tokyo's ballooning debt back under control. Industrial output rose 1 percent last month after a record plunge immediately after the magnitude 9.0 quake and a tsunami it set off, and companies said they planned to crank up output further in May-June, bringing it close to pre-disaster levels.
The upbeat outlook spurred talk that the world's third-largest economy could be poised for a V-shaped recovery after the disaster knocked Japan back into its second recession in three years and a third downturn in a decade. However, manufacturers' optimism failed to impress Moody's which on Tuesday put Japan's sovereign debt on a watch for a possible downgrade. It cited huge costs of dealing with the quake's aftermath and concerns that the government's response to economic challenges may prove inadequate.
"The much larger than initially expected economic and fiscal costs of the March 11 earthquake are magnifying the adverse effects imparted by the global financial crisis from which Japan's economy has not completely recovered," Moody's said. The rating agency cut Japan's outlook to negative in February and moved one step closer to a possible downgrade by putting its Aa2 rating on review.
Japan has been mired in economic stagnation for much of the past two decades and its repeated efforts to jolt the economy back to life with stimulus spending propelled public debt to twice the size of its $5 trillion economy. Moody's voiced doubts the Japanese economy could grow fast enough to bring down fiscal deficits and warned political infighting could scupper tax and social security reforms needed to stabilise public finances.
"The government intends to introduce a comprehensive tax reform program in June. However, Japan's divided Diet and the intensifying level of political challenges to Prime Minister Kan together continue to threaten to bog down such efforts," Moody's said.
Although Tokyo faced no immediate risk that borrowing costs would spike up, the buildup of debt could not go on forever and at some point would reach a tipping point where markets would start demanding much higher premiums for lending to Japan, Moody's said. Kan told parliament he would stay on to resolve the worst nuclear crisis in 25 years and most political commentators think he will survive the vote. But he needs opposition votes to pass spending bills and other legislation in a divided parliament and the looming face-off bodes ill for any form of co-operation between the ruling party and the opposition.