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. But the US rating agency warned of the possibility of a credit downgrade if the government fails to achieve meaningful medium-term fiscal consolidation and stabilisation of debt.
"A return of significant deflationary pressures that accompanies a severe loss in economic momentum, or a deterioration in debt affordability due to higher funding pressures would be credit negative," it said in a statement. While progress in reflating the economy was not as rapid as originally planned, the government was reining in its huge public debt and pushing through structural reform policies such as labour market reform, Moody's said.
Japan's very low interest costs and large pool of domestic savings mitigate the risk posed to its credit profile by the government's enormous debt load, it said. "A very accommodative monetary policy stance will continue to contribute to the low yields on Japanese government bonds (JGBs)," Moody's said. Japan's economic growth ground to a halt in April-June as weak exports and shaky domestic demand prompted companies to cut spending, putting fresh pressure on premier Shinzo Abe to come up with policies that will produce more sustainable growth.
Abe's cabinet this month announced an economic package with 13.5 trillion yen ($133 billion) in fiscal measures, hoping it would help the economy deflect external headwinds and sustain a moderate recovery. But the plan will take time to pay dividends and sceptics say there is not enough new spending. The Bank of Japan also expanded stimulus last month via a modest increase in purchases of risky assets, and it remains under pressure to do more in September, when it conducts a thorough assessment of the effects of its stimulus programme.
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