Japan Debt Rating Raised By Moody's on Fiscal Policy

By Gregory Turk and Lily Nonomiya

June 30 (Bloomberg) -- Japan's debt rating was raised one level to Aa3 by Moody's Investors Service, which said the government will keep trying to restrain spending to reduce debt.

The increase from A1 ``was prompted by expectations of continued fiscal restraint and consolidation, coupled with an easing-out of the debilitating effects of deflation,'' Thomas Byrne, senior vice president of Moody's, said in a statement. ``The government and ruling party is firmly committed to fiscal consolidation.''

Prime Minister Yasuo Fukuda last week reiterated his pledge to balance the budget by 2011 so that the government can cut the world's largest public debt. Economists say Japan hasn't done enough to pare the debt, which the Organization for Economic Cooperation and Development estimates stands at 182 percent of gross domestic product.

``I wonder why Moody's is upgrading now while Japan still faces a harsh fiscal environment,'' said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. ``On the top of that, they probably downgraded too far before.''

The increase to the fourth-highest investment grade came eight months after Moody's raised the rating to A1 and puts Japan on a par with Taiwan and Cyprus. Japan still ranks the lowest among the Group of Seven nations. Within the G-7 only Italy, with Aa2, and Japan have ratings below the top Aaa grade.

Four Cuts

After Moody's assigned Japan Aaa in 1993, the rating had been cut four times since 1998 as the nation's borrowings swelled.

The yen traded at 106.21 per dollar at 12:43 p.m. in Tokyo from 106.28 before the announcement. The yield on Japan's 10- year bond fell 1 basis point to 1.6 percent.

``News on Moody's upgrade was a big surprise,'' said Yuji Saito, head of foreign-exchange sales at Societe Generale SA in Tokyo. ``This is all because we Japanese think the Fukuda administration is reluctant to cut spending and the Japanese economy is slowing.''

Moody's said Japan's economy is ``resilient'' to a global slowdown and added that it didn't expect any ``preemptive'' interest-rate increases by the Bank of Japan because inflation in the world's second-largest economy is still lower than in other countries.

The central bank's benchmark overnight lending rate is 0.5 percent, the lowest in the industrialized world. Consumer prices excluding fresh food climbed 1.5 percent in May, the fastest pace in a decade.

Further improvement in the nation's debt rating hinges on government efforts towards ``sustained fiscal consolidation'' and debt reduction and a falling birthrate and rising welfare costs will be headwinds for Japan, Moody's added.

Moody's was criticized by the government and summoned to parliament in 2002, when it cuts its rating below Botswana's. Masajuro Shiokawa, then the nation's finance minister, called Moody's ``out of touch with reality.''

To contact the reporters on this story: Drew Gibson in Tokyo at dgibson2@bloomberg.net; Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net