April 27, 2011

Japan's Outlook Cut on Earthquake Costs

S&P threatens further ratings cut if revenues do not increase

Standard & Poor's cut Japan's sovereign rating outlook on Wednesday from stable to negative, warning that a credit-rating cut will follow if the country cannot raise additional revenues.

Reuters reported that the ratings agency left Japan's sovereign rating itself unchanged at AA-, the country's lowest among ratings agencies. However, S&P also cited the massive expenses generated by the quake disaster in March as leading to the additional cut in ratings without some action on the part of Tokyo, such as an increase in taxes. In a statement, the company said, "If there are no revenue enhancing measures such as tax increases, we expect the central and local governments to bear most of this cost."

Japan's public debt already stands at $10 trillion, which is double the size of its economy. S&P said that reconstruction costs that could go as high as 50 trillion yen ($613 billion) could drive that total substantially higher. However, NaotoKan, Japan’s prime minister, has thus far been unable to take decisive action thanks to his own unpopularity and the strength of the opposition, which so far has managed to thwart fiscal reform by holding a majority in the upper house of parliament.

Takuji Okubo, chief economist at Societe Generale, said in a statement, "This [cut in outlook] will put more pressure on the Japanese government to do something about revenue enhancement," adding that it could help the case for fiscal reform and prompt an increase in the 5% consumption tax—something that the country’s finance minister, Yoshihiko Noda, has acknowledged is necessary.

Noda was quoted in the report saying, "Fiscal reform is something we cannot avoid. The government at present is doing its utmost for disaster relief and reconstruction. It is important to pursue fiscal reform at the same time. We will try to gain trust in Japan's economy and public finances in and outside Japan."

Reprints Discuss this story
This is where the comments go.