Japan maintains A+ rating

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Ratings agency Fitch keeps country on Negative Outlook

Fitch Ratings has affirmed Japan’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘A+’ with a Negative Outlook.

In a statement the agency said that the affirmation of Japan’s sovereign ratings “in part reflects the greater commitment of the Bank of Japan and government to bring to an end two decades of economic stagnation and deflation”.

Explaining their decision Fitch said the ratings and outlooks were sensitive to a number of assumptions:

– Fitch assumes Japanese sovereign funding conditions do not deteriorate substantially and for a prolonged period. A sharp and sustained increase in nominal effective yields on government debt could endanger Japan’s sovereign solvency and see the ratings downgraded by more than one notch if it occurred, but the agency considers this scenario to be unlikely.

– The ratings assume there is no significant crystallisation of regional geopolitical risk, for example an armed conflict between Japan and China or an outbreak of war on the Korean peninsula

– The ratings further assume there is no sharp and sustained escalation in global economic and financial volatility over the forecast period, for example an event with an impact on the scale of the collapse of Lehman Brothers

If successful and underpinned by structural reform to raise Fitch argued that with the potential for growth alongsidde a credible medium-term deficit reduction plan, Japan’s adverse public debt dynamics could be corrected.

The Negative Outlook though reflects the uncertainty over the success of these efforts to shift the economy onto a more positive real and nominal growth path as well as the absence of more detailed reform and fiscal consolidation programme.

Fitch also announced that Japan’s Short-term IDR has been affirmed at ‘F1+’, whilst the Country Ceiling has been affirmed at ‘AA+’.

In a report on the country’s rating the agency cited Japan’s public finances as the key rating weakness. Gross general government debt (GGD) was 230.5% of GDP by end-2012, by far the highest of any rated sovereign. Japan is less of an outlier in terms of net financial liabilities (134% of GDP at end-2012) given its unusually large stocks of assets, including the world’s second-biggest stock of official foreign reserves of USD1,268bn (end-2012). However, on any measure Japan’s public indebtedness is high and is set to rise strongly, eroding the credit profile.

Japan’s budgetary position has worsened sharply even relative to other fiscally-challenged high income sovereigns since the onset of the global financial crisis in 2008 on both a headline and cyclically-adjusted basis, the agency argues.

Fitch’s current base case projection is for the GGD/GDP ratio to stabilise only by FY20. Fitch currently assesses this base case as likely to be consistent with a downgrade of the sovereign ratings, most likely by one notch, over the next two years. The agency said they would need to become more confident that the primary deficit was set to decline in a sustainable manner over time before considering restoring the ratings to Stable Outlook.

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