S&P affirms Japan's debt rating as negative rates lower government debt burden

Standard & Poor's Ratings Services on Thursday affirmed Japan's A+/A-1 sovereign debt rating and maintained a stable outlook despite its heavy debt burden, saying political stability and stable financial system offset fiscal woes. The rating agency said it expected Japan's nominal economic growth to average 2 percent, and negative interest rates on newly issued bonds to ease and stabilise the government's debt burden over the next two years.
The government has benefited from the Bank of Japan's radical step to adopt negative interest rates, which has pushed yields on Japanese government bonds (JGBs) down near or even below zero. "Currently, at least 70 percent of Japanese government securities yield negative returns. Japan has by far the world's highest debt rollover ratio (including short-term debt)," S&P said in a statement. "These negligible yields will thus soon pass through to, and bring down, the government's borrowing costs."
The agency said it could raise Japan's sovereign ratings if it significantly improved its fiscal health, which would likely be brought on by stronger economic growth. However, S&P warned it could lower its sovereign ratings if policymakers failed to sustain growth, keep deflation at bay and eventually stabilise the government debt burden. A rise in real interest rates would "severely strain the government's debt dynamics," it also said. Moody's Investors Service on Tuesday affirmed Japan's A1 sovereign debt rating and maintained a stable outlook, citing ultra-low funding costs and continued progress in government efforts to reflate the economy.