Japan’s Debt Ratings Unified at Aa2 by Moody’s

By Steven McPherson and Keiko Ujikane

May 18 (Bloomberg) -- Japan’s local and foreign-currency debt ratings were brought to the same level, Aa2, by Moody’s Investors Service to reflect that the repayment risk for each is equal.

Moody’s cut the foreign-currency debt rating from Aaa and raised the local-currency assessment from Aa3, saying it can no longer assume that Japan would be more likely to repay debt borrowed in currencies other than the yen. The outlook remains stable, Moody’s said in a statement today.

Moody’s said Japan’s “considerable strengths” in terms of foreign reserves and household savings need to be balanced against its burgeoning debt. Prime Minister Taro Aso has pledged to spend 25 trillion yen ($263 billion) to counter Japan’s worst postwar recession, adding to debt that the Organisation for Economic Cooperation and Development says will swell to almost twice the size of the economy next year.

“The upgrade of the local-currency debt rating is psychologically positive” for local bond investors, said Akitsugu Bandou, senior economist in Tokyo at Okasan Securities Co. Investors shrugged off the downgrade to the foreign- currency rating because Japan has “almost no exposure” to debt denominated in other currencies, Bandou said.

The yield on Japan’s benchmark 10-year bond fell two basis points to 1.405 percent at the close in Tokyo. The yen was initially little changed before weakening to 95.79 per dollar at 10:05 a.m. in London from 95.01 before the announcement.

Hong Kong, Italy

The rating is the third-highest investment grade, equivalent to Standard & Poor’s AA and one notch higher than Fitch Ratings’ AA-. It puts Japan on a par with Hong Kong and Italy. Within the Group of Seven industrialized nations, only Italy and Japan have assessments below Aaa.

Moody’s said Japan is cushioned by its large household savings and foreign reserves as well as a “strong home bias” of investors in government bonds. Japan had $1 trillion in foreign reserves as of April 30, the most after China, and households have financial assets totaling 1,400 trillion yen.

Meanwhile the debt, the world’s largest, “leaves the country’s fiscal position vulnerable to shocks or imbalances that would cause a sharp rise in interest rates,” it said.

New bond sales will climb to an unprecedented 44.1 trillion yen for the year ending March. Total bond sales will surge to 130.2 trillion yen, also the highest ever.

Absorbing Bond Sales

Moody’s said domestic investors “will absorb the record level of bond issuance this year to fund the government’s economic stimulus program.”

So far there’s no indication that investors will become hesitant about buying the debt, though “perhaps that could happen if the government doesn’t resume its course of fiscal consolidation, and that would have negative rating implications,” Thomas Byrne, senior vice president at Moody’s, said at a press conference in Tokyo.

The OECD said in March that Japan’s public debt, already the world’s largest, will balloon to 197 percent of gross domestic product in 2010.

“The Ministry of Finance has to be satisfied with this, given the additional borrowing that’s planned -- plus the economy is hardly booming,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “The bottom line is that they’re still way ahead of where they were a couple years ago.”

Moody’s assigned Japan the top Aaa rating in 1993, and since 1998 made four cuts as the nation’s borrowings swelled. It began raising the assessment in 2007. In Asia-Pacific, only Australia, New Zealand and Singapore retain the top rating.

Fiscal Discipline

Finance Minister Kaoru Yosano said last month that while fiscal spending is necessary to prop up the economy and employment during the current crisis, the government needs to keep a grip on its finances over the longer term.

Analysts expect a Cabinet Office report on May 20 to show the world’s second-largest economy contracted the most since World War II last quarter as exports collapsed. GDP shrank an annualized 16.1 percent in the three months ended March 31, according to the median estimate of economists surveyed.

Still, recent reports suggest that represented the low point for Japan. Overseas demand is beginning to stabilize and Aso’s stimulus plans are providing at least temporary relief to consumers facing job losses and wage cuts.

Household confidence climbed to a 10-month high in April, the Cabinet Office said today. Industrial production rose in March for the first time in six months as manufacturers replenished inventories. Exports had their first month-on-month gain since May 2008.

The government will raise its assessment of the economy for the first time in more than three years later this month, the Asahi newspaper reported last week.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net