Credit ratings agency Standard & Poor’s (S&P) has sounded another alarm over Japan’s debt load. Having trimmed Japan’s credit rating in January, S&P has changed its outlook from ‘stable’ to ‘negative’, meaning it could reduce the rating again.
The agency is worried that if Japan doeesn’t boost its revenue, the reconstruction costs of the earthquake will add 3.7% to the deficit over the next two years. It expects annual deficits to stay above 8% of GDP until 2014. Japan’s overall debt pile is double its GDP. Meanwhile, post-earthquake economic data for March and April began to come through this week.
What the commentators said
This will “put more pressure on the Japanese government to do something” about beefing up revenue, Takuji Okubo of Société Générale told Reuters.com. The basic plan is to raise the “consumption tax”, but the loss of the government’s majority in the upper house last year has caused a political stalemate.
Japan has avoided a Greek-style crisis despite its debt pile approaching 210% of GDP, because domestic investors hold 95% of government paper. They accept low interest rates because there is no inflation to erode the bonds’ value. But this isn’t sustainable. With the population ageing rapidly and needing to pay for retirement, locals are set to sell bonds, and rates will have to rise to attract foreigners, making the debt much more of a burden. So while the market shrugged off this week’s outlook change, “one day there will be a more serious reaction”, warned Rob Ryan of BNP Paribas.
In the meantime, we can’t count on growth making much of an impression on the debt pile for now. The earthquake’s impact is shaping up to be worse than everyone thought, said Capital Economics. April’s survey of small business confidence posted the sharpest monthly slide since the data was first collected in 1985. Retail sales in March saw their worst monthly decline since the Asian Financial Crisis in 1997. Expect “an outright recession” this year.