Moody’s downgraded Japan’s credit rating one step to AA3 Wednesday, citing the country’s massive debt, weak growth prospects and constant political uncertainty.
The downgrade came as no surprise to analysts, and bond markets remained relatively calm.
A rating of AA3 is regarded as a very low risk, but somewhat susceptible to long-term risks. Standard & Poor’s ranks Japan as AA-, equivalent to Moody’s AA3. While Standard & Poor’s downgraded the U.S. earlier this month to AA+, Moody’s maintained the U.S.’s credit rating at AAA.
Even as Moody’s downgraded Japan’s rating, they highlighted the country’s large economy and dependable domestic funding base that enables the government to fund itself, “at a lower nominal cost than any other advanced economy.”
“Furthermore, throughout the global financial crisis, in the months after the March earthquake, and in recent days with renewed turmoil in global markets, (Japanese government bonds) continue to demonstrate exceptionally strong safe-haven features,” Moody’s said.
I have questioned before whether Japan’s economy was “down for the count.” I mentioned that the government has spent itself into a hole with public debt, and that it shows no signs of changing any time soon.
At 225.8 percent of the country’s GDP, Japan has set a world record for public debt. (The U.S.’s public debt, by comparison, is 58.9 percent of it’s GDP.) The government has barely managed to keep the economy afloat through massive pork-barrel spending projects.
While this level of debt would be catastrophic in other countries, I maintain that it does not signal crisis in Japan. Note that the government owes most of its debt to its people. Japan’s external debt is relatively low at 45 percent of its GDP, compared to the U.S.’s 99 percent. Since the Japanese place so much value on social harmony and hierarchy, if the government does in fact default on its public debt, the Japanese people will just accept it, tighten their belts, and carry on as their duty as Japanese citizens. Most young people in Japan are already inured to the idea that they won’t receive the generous benefits their grandparents currently receive.
One fundamental problem with Japan’s economy is that it is too reliant on exports. For some reason, the government has always emphasized exports and discouraged domestic consumption, apparently thinking the only way to get rich was to sell as much as possible overseas and then hoard all the income at home. It seems prudent until you consider that this has made Japan over reliant on income from exports. Japan’s economy has become too susceptible to fluctuations in foreign markets. The Japanese feel the impacts of overseas bubbles more acutely than people in those countries. And since prices remain extortionately high in Japan, domestic consumption can’t compensate for those fluctuations.
Japan is taking another battering with the record-high yen-to-dollar exchange rate at the moment, which further hurts exports. Tokyo blames the surge in the yen on currency speculators, and today announced a $100 billion loan program to encourage Japanese companies to take advantage of the strong yen by acquiring and merging with foreign companies, while simultaneously pushing the yen down by buying up foreign currency.