Rating agency R&I: May cut Japan rating before April

(Reuters) – A Japanese rating agency said it may cut the country’s sovereign rating before local elections in April as deepening political turmoil could delay efforts to fix tattered public finances.

Rating and Investment Information (R&I), one of the country’s two rating agencies, affirmed Japan’s sovereign rating in January at AAA, its highest, with a negative outlook, before Standard & Poor’s cut Japan’s credit rating on January 27 for the first time since 2002.

Moody’s Investors Service also warned last month that it may cut Japan’s sovereign credit rating if government policies fall short of the comprehensive tax reform needed to bring ballooning public debt under control.

If R&I cuts Japan’s rating, it would be the first downgrade by the Japanese rating agencies, Masatoshi Taniguchi, chief analyst at R&I, said on Monday.

The world’s leading credit agencies have never downgraded their own country’s ratings in the past, he said.

“We had considered local elections in April as one event that could drastically alter the political situation and prompt our rating action, but something could happen before that,” Taniguchi told Reuters in an interview.

“We’re watching to see if anything happens that could alter our expectations for the government to proceed with fiscal rebuilding as planned.”

The warning came a day after Foreign Minister Seiji Maehara resigned over a political funding scandal, bringing unpopular Prime Minister Naoto Kan under further pressure to quit or call a snap election his party would probably lose.

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Kan’s resignation would not necessarily prompt an immediate downgrade of Japan, Taniguchi said, adding that his agency will focus on whether the government can continue with to its fiscal reform plans, including crafting a roadmap on welfare and tax reforms by June.

R&I said last month that political turmoil has put mounting downward pressure on Japan’s sovereign creditworthiness, citing fading prospects for passage of bills to implement a workable budget in the fiscal year from April 1.

Taniguchi said the agency believed downward pressure had further increased, adding that a downgrade would probably be within a narrow range between one and two notches given Japan’s stable current account surpluses and ample domestic savings.

“Looking at the current political situation, it’s impossible to foresee what may happen next. Now we’re worried about what will happen to the cabinet after the sudden resignation of Maehara,” he added.

Kan is battling to pass bills needed to implement a $1 trillion budget for the new fiscal year as opposition parties big and small refuse to cooperate in a divided parliament.

Failure to pass budget-related bills could cause a shutdown of some parts of the government as early as in the summer, similar to what happened in the United States in the 1990s, and increase the chance of a downgrade of Japan’s debt rating.

R&I has warned that Japan’s ability to keep its AAA rating was reaching its limit and a downgrade would be unavoidable if the government delayed key reforms and leaned toward an expansionary fiscal stance as a result of political concessions.

(Editing by Michael Watson)


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