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Ratings On Japan Lowered To 'AA-'; Outlook Stable

Publication date: 27-Jan-2011 02:54:01 EST

  • Standard & Poor's expects Japan's fiscal deficits to remain high in the next few years, which will further reduce the government's already weak fiscal flexibility.
  • We have lowered Japan's long-term sovereign credit ratings to 'AA-' from 'AA'. We affirmed the short-term ratings at 'A-1+'.
  • The outlook on the long-term rating is stable, reflecting our view that Japan's strong external balance sheet and monetary flexibility partially offset the pressures stemming from the fiscal side.
SINGAPORE (Standard & Poor's) Jan. 27, 2011--Standard & Poor's Ratings 
Services said today that it had lowered its long-term sovereign credit ratings 
on Japan to 'AA-' from 'AA'. At the same time, we affirmed the 'A-1+' 
short-term sovereign credit ratings. The outlook on the long-term rating is 
stable. The transfer and convertibility (T&C) assessment remains 'AAA'.

The downgrade reflects our appraisal that Japan's government debt 
ratios--already among the highest for rated sovereigns--will continue to rise 
further than we envisaged before the global economic recession hit the country 
and will peak only in the mid-2020s. Specifically, we expect general 
government fiscal deficits to fall only modestly from an estimated 9.1% of GDP 
in fiscal 2010 (ending March 31, 2011) to 8.0% in fiscal 2013. In the medium 
term, we do not forecast the government achieving a primary balance before 
2020 unless a significant fiscal consolidation program is implemented 

Japan's debt dynamics are further depressed by persistent deflation. Falling 
prices have matched Japan's growth in aggregate output since 1992, meaning the 
size of the economy is unchanged in nominal terms. In addition, Japan's 
fast-aging population challenges both its fiscal and economic outlooks. The 
nation's total social security related expenses now make up 31% of the 
government's fiscal 2011 budget, and this ratio will rise absent reforms 
beyond those enacted in 2004. An aging and shrinking labor force contributes 
to our modest medium-term growth estimate of around 1%.

In our opinion, the Democratic Party of Japan-led government lacks a coherent 
strategy to address these negative aspects of the country's debt dynamics, in 
part due to the coalition having lost its majority in the upper house of 
parliament last summer. We think there is a low chance that the government's 
announced 2011 reviews of the nation's social security and consumption tax 
systems will lead to material improvements to the intertemporal solvency of 
the state. We even see a risk that the Diet might not approve budget-related 
bills for fiscal 2011, including government financing authorization. Thus, 
notwithstanding the still strong domestic demand for government debt and 
corresponding low real interest rates, we expect Japan's fiscal flexibility to 

That said, the sovereign ratings on Japan are supported at the lower 'AA-' 
level by the country's ample net external asset position, relatively strong 
financial system, and diversified economy. In addition, the yen is a key 
international reserve currency. 

Japan is the world's largest net external creditor in absolute terms, with 
projected net assets of an estimated 254% of current account receipts at 
yearend 2010. The country's current gold and foreign exchange reserves of over 
US$1 trillion are second only to China's. In addition, both the financial 
sector and the corporate plus household sectors are external creditors. 
Standard & Poor's expects continued current account surpluses to further 
enhance Japan's net external asset position in the coming years.  
The stable outlook on our ratings on Japan balance weak public finances and 
anemic growth prospects with its strong external position and the flexibility 
afforded by the yen's international role. Should the government be able to 
consolidate its finances and to enact measures to improve its growth 
prospects--as it did in the early part of the last decade--upward pressure on 
the ratings would build.  Conversely, if we again mark down our fiscal 
forecasts, downward pressure on the ratings could reemerge.

Ratings List

Ratings lowered 

                     To                    From
Foreign currency     AA-/Stable/A-1+       AA/Negative/A-1+
Local currency       AA-/Stable/A-1+       AA/Negative/A-1+


Standard & Poor's will hold a teleconference regarding this rating action. 
Time for Japanese call:
5:00 – 5:45pm (Japan time)

4:00 – 4:45pm (Hong Kong / Singapore Time)
Time for English call:
6:00 - 6:45pm (Japan time)

5:00 - 5:45pm (Hong Kong / Singapore time)

Live Dial-in Numbers:
CHINA Toll Free Number       10800-712-1470 or 10800-120-1470
JAPAN Toll Free Number       00531-12-0955
JAPAN Toll Number (Tokyo)    81-3-5539-7116
JAPAN Toll Number (Osaka)    81-6-7739-4875
HONG KONG Toll Numbers       852-3001-3802            
SINGAPORE Toll Free Number   800-120-5226
PASSCODE (required)  
For Japanese call at 3pm Japan/2pm HK  SANDP
For English call at 4pm Japan/3pm HK    SNP

Please dial in 10 minutes prior to scheduled teleconference time



HK TOLL #: 852-3018-4150
JPN TOLL #: 81-3-5539-6690
JPN TOLL FREE #: 00531-12-2387
SG TOLL FREE #: 800-120-5791



HK TOLL #: 852-3018-4149
JPN TOLL #: 81-3-5539-6689
JPN TOLL FREE #: 00531-12-2270
SG TOLL FREE #: 800-120-5701



A Japanese-language version of this media release is available on Standard & 
Poor's Research Online at, or via CreditWire Japan on 
Bloomberg Professional at SPCJ <GO>. Complete ratings information is available 
to RatingsDirect on the Global Credit Portal subscribers at and RatingsDirect subscribers at All ratings affected by this rating action can be found 
on Standard & Poor's public Web site at Use the 
Ratings search box located in the left column.

Primary Credit Analysts:Takahira Ogawa, Singapore (65) 6239-6342;
Elena Okorotchenko, Singapore (65) 6239-6375;

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