Moody’s Downgrades Japan One Notch

Rating agency cites political situation as reason; Japan now at same level as China

japanese flagMoody's Investors Service fulfilled a warning on Wednesday it had issued in May and further downgraded Japan's credit rating, although its reasons had shifted just a bit since then. The move brought the country's rating to Aa3, on a par with China, and a notch below Spain and Italy, and the company's statement cited the political situation as a substantial contributor to the decision.

Citing not only high debt levels and the destruction wrought by the Fukushima disaster, the statement also turned its attention to the state of the countrys government as one reason its recovery would be prolonged and its rating worthy of a cut: “… [A] divided Diet and tensions within the ruling Democratic Party of Japan risk both the timing and implementation of the reform plan. Indeed, the imminent change in the party's presidency and the election of a new prime minister reflect the factious nature of the country's politics.”

The New York Times reported that the downgrade comes as Japan prepares for its fifth prime minister in six years, with Naoto Kan expected to step down by the end of this month. He has been roundly criticized for his handling of the disaster earlier this year.

One of his potential successors is Yoshihiko Noda, the current finance minister, who has been a supporter of aggressive moves to contain the country's debt. Within hours of the downgrade announcement, the Japanese government revealed a $100 billion credit facility that it is hoped will assist the country in getting through the recent spike in the value of the yen, previously reported by AdvisorOne.

The currency's soaring value has caused problems for the country's economy, as dependent as it is on exports. In the report, Noda said of the move, “Taking into account that there is a lopsided rise in the yen, I felt that swift measures were needed.”

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