Fitch Says Japan Recovery to Be ‘Modest and Fragile’

By Lily Nonomiya

Nov. 10 (Bloomberg) -- Japan is unlikely to experience a “rapid economic recovery” as a stronger yen, falling prices and unemployment weigh on growth, Fitch Ratings said.

“The recovery process for Japan in 2010 is expected to be modest and fragile, since domestic economic conditions point towards a possibly extended period of deflation,” David Riley, head of global sovereign ratings at Fitch, said in a statement released in Tokyo today.

Reports today painted a mixed view of the world’s second- largest economy, with the current-account surplus unexpectedly widening in September while merchant sentiment tumbled to a five-month low. Japanese government bond yields advanced to their highest level in four months yesterday on concern Prime Minister Yukio Hatoyama’s government will exacerbate what is already the largest debt burden in the industrialized world.

Fitch said the possibility of prolonged price declines would pose a “material risk” to the outlook for the country’s debt. The company has an AA rating and a stable outlook on Japan’s long-term, foreign-currency borrowings, the third- highest grade.

The yen traded at 89.80 per dollar at 4:11 p.m. in Tokyo from 89.93 late yesterday, and has gained 8.2 percent in the past three months, eroding the value of exporters’ repatriated profits and making their products more expensive abroad.

‘Very Concerned’

Ten-year yields fell half a basis point to 1.47 percent. They are up from 1.31 percent before the Democratic Party of Japan won an Aug. 30 election and climbed to 1.475 percent yesterday, the highest level since June 17.

“Maintaining the trust of investors in the government bond market is our priority,” Finance Minister Hirohisa Fujii said today, adding that he’s “very concerned” about the recent increase in yields.

Japan’s economy emerged from its worst postwar recession in the second quarter, and analysts predict a report next week will show the expansion accelerated in the three months ended September. Gross domestic product rose at an annual 2.9 percent pace from the previous quarter, according to the median estimate of 17 economists surveyed by Bloomberg News.

The government’s fiscal and monetary stimulus measures have been “effective in preventing an even sharper economic downturn,” Fitch said. The government is spending more than 20 trillion yen ($223 billion) to spur growth, while the Bank of Japan has cut interest rates to 0.1 percent and bought corporate debt from lenders to funnel cash to businesses.

Fewer Bankruptcies

The programs helped corporate bankruptcies decline for a third month in October, according to a report released by Tokyo Shoko Research Ltd. today. The central bank last month said it will end its corporate debt purchases in December, citing an improvement in companies’ ability to raise funds.

The current-account surplus widened 0.2 percent in September from a year earlier to 1.57 trillion yen, the Finance Ministry said in Tokyo, as world stimulus spending helped to ease declines in exports.

The nation’s Economy Watchers index, a gauge of sentiment among merchants, slid to 40.9, prompting the Cabinet Office to say it was more pessimistic about the economic outlook.

“The recovery may be approaching a slowdown,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “The worst is over, but to see real improvements in sentiment among consumers and retailers, we have to see a better job market.”

Not Spreading

Seven months of gains in industrial production have yet to spread to consumers, whose spending accounts for more than half of the economy. Wages have slid for 16 months, exacerbating declines in consumer prices. The Bank of Japan last month forecast deflation will extend into fiscal 2011 even as economic growth picks up.

Riley said the AAA ratings of economies including the U.S. and U.K. have given policy makers “flexibility” in rolling out stimulus packages, yet the outlays have also stretched their budgets, making the scope for further measures limited.

“Many credit profiles of major ‘AAA’ sovereigns have been significantly weakened by the financial crisis and the subsequent recession,” said Riley. “Thus, the already out- sized budget deficits and the rise in government debt had reduced the ‘fiscal space’ for policy makers to respond to further adverse shocks.”

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net