Moody’s Cuts Japan Debt Outlook to Negative

Warns that without action on deficit, Tokyo may see ratings downgrade

Moody’s Investors Service on Tuesday cut its outlook on Japan’s sovereign debt to negative, warning that the nation must take substantive action to control its debt or it will be in for a ratings downgrade.

AFP reported that, while Moody’s previously graded Japan as "stable" at Aa2, analysts believed that the change in outlook was a precursor to a downgrade. Standard & Poor’s in January had cut Japan’s credit rating for the first time since 2002, citing as the cause a lack of a coherent policy on the part of the government to address its debt.

In a statement, Moody’s said, "The rating action was prompted by heightened concern that economic and fiscal policies may not prove strong enough to achieve the government's deficit reduction target and contain the inexorable rise in debt, which already is well above levels in other advanced economies."

Reuters reported that Japan believed there was no immediate danger since 95% of its debt was held domestically. However, with an aging population preparing to spend some of its savings to pay for retirement, concerns are that the problem will only worsen. Another concern is stability at top levels of government, where the fifth prime minister since 2006 is attempting to push through fiscal reform policies in the midst of calls for him to step down.

Tom Byrne, Moody's senior vice president and regional credit officer, said in the report, "Effective fiscal reform most likely requires stability at the top levels of government." At a news conference he said that since the departure of Junichiro Koizumi in 2006 after a term of more than five years, the change in Tokyo has been constant. He added, "Since Koizumi, there have been three Liberal Democratic Party prime ministers and one Democratic Party prime minister who have served for a year or less."

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