S&P threatens to cut Japan’s rating over soaring debt

Standard and Poor’s on Tuesday threatened to cut Japan’s rating unless it produced a credible plan to rein in its soaring debt and lift growth in an economy plagued by persistent deflation.

The warning in the form of a downgrade in Japan’s debt outlook coincided with Bank of Japan’s policy meeting where it forecast price declines would be less severe than thought.

Still, faced with renewed calls from the government to do more to support the economic recovery, the central bank signalled it was open to relaxing its loose policy even further.

Japanese policymakers, however, are in a tight spot, with public debt heading towards 200 per cent of gross domestic product — the highest among developed economies — interest rates near zero and the central bank’s several emergency funding schemes still in place.

S&P, which cut its outlook on Japan’s long-term sovereign debt rating to negative from stable, highlighted the shrinking room for policy manoeuvre and persisting price declines that threaten economic recovery as the key reasons for its warning.

“The outlook change reflects our view that the Japanese government’s diminishing economic policy flexibility may lead to a downgrade unless measures can be taken to stem fiscal and deflationary pressures,” the agency said.

“Moreover, the policies of the new Democratic Party of Japan (DPJ) government point to a slower pace of fiscal consolidation than we had previously expected.”

Agost Bernard, associate director for sovereign ratings at S&P, said that the rating could change any time within the two-year horizon of the new outlook.

The outlook cut follows similar warnings from Moody’s and Fitch that their ratings hinged on Tokyo’s efforts to control government finances.

The warnings come at the worst possible time for the four-month old government of Prime Minister Yukio Hatoyama, struggling with a funding scandal and facing pressure to deliver oncampaign promises ahead of mid-year upper house polls.

Hatoyama needs to win to avoid a policy deadlock that the struggling economy can ill afford. His ministers have been piling pressure on the Bank of Japan to go beyond steps taken so far to support the economy.