Fitch to Keep Japan’s Debt Rating Even as Fiscal Goal Abandoned

By Mayumi Otsuma

June 17 (Bloomberg) -- Fitch Ratings Ltd. said it will maintain Japan’s sovereign debt rating at AA- even after the government abandoned its goal of balancing the budget by 2011.

“We maintain a stable outlook on Japan’s ratings, suggesting there will be no change in the coming year,” James McCormack, head of Asian sovereign ratings at Fitch, wrote in an e-mailed reply to questions. “We recognized some time ago that the original target of 2011 was not possible.”

Prime Minister Taro Aso’s economic advisory panel last week proposed that the government postpone its target of eradicating the budget deficit to 2019. The original target became unattainable after the worst postwar recession caused tax revenue to fall and prompted Aso to provide stimulus plans equivalent to about 5 percent of gross domestic product.

Fitch’s AA- rating for Japan’s local-currency long-term debt is its fourth highest and one notch lower than Moody’s Investors Service’s Aa2 and Standard & Poor’s AA. Within the Group of Seven nations only Japan and Italy have assessments below the top grade at each ratings company.

Moody’s said last month that it’s unlikely to cut Japan’s debt rating over the next year because investors remain willing to buy government bonds and the economy will probably recover.

“Japan’s government debt versus GDP ratio is much higher than those of any other country, including the U.S. and U.K.,” McCormack said. Fitch forecasts Japan’s public debt will reach 200 percent of GDP by 2010; the U.S. burden will climb to about 90 percent and the U.K. will reach 80 percent, he said.

Fiscal Policy Goals

Fitch monitors fiscal policy objectives to assess ratings since they can “drastically” alter the proportion of debt to GDP, the annual budget deficit and the government’s debt- servicing costs, he said.

Higher borrowing costs may also make it harder for the government to pay for stimulus measures. The yield on Japan’s benchmark 10-year bond rose to an eight-month high of 1.56 percent on June 11. A one percentage-point gain in the yield on the 10-year bond would increase the government’s burden by about 1.3 trillion yen ($13 billion) next year, the Finance Ministry projects.

Finance Minister Kaoru Yosano said in an interview last week the government is “determined to take responsibility for the country’s fiscal and economic management” over the long term.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net