Japan's Fiscal Deficit

Bloomberg yesterday:

Japan's Debt Rating May Be Raised From A2 By Moody's


July 4 (Bloomberg) -- Japan's local currency debt rating may be raised, Moody's Investors Service said, citing progress in government efforts to reduce the world's largest public debt.

The long-term, local-currency debt rating of A2, the sixth highest of 10 investment grades, is being reviewed, Moody's said in a statement today. Japan has 834.4 trillion yen ($6.82 trillion) in public debt, the equivalent of the economic output of Asia-Pacific's next largest 13 economies combined.

Prime Minister Shinzo Abe has pledged to balance the budget by 2011 by cutting spending and possibly raising the national sales tax from 5 percent. The government will probably reduce bond sales for a third year in the 12 months starting next April, Chikahisa Sumi, director of debt management policy at the Finance Ministry, said last week.

``Moody's evaluated Japan's steady economic growth and continuous efforts to decrease its debt,'' said Hiromichi Shirakawa, a former Bank of Japan official who's now chief economist at Credit Suisse Group in Tokyo. ``Still, Japan has a long way to go to emerge from the red and economic growth is too slow to repay the debt without a tax increase.''

The yen traded at 122.37 per dollar at 4:06 p.m. in Tokyo from 122.36 before the statement was published. The yield on Japan's 10-year bond rose 1.5 basis points to 1.9 percent.

``Sustained improvement, albeit gradual, in Japan's macroeconomic performance has helped support Japan's fiscal consolidation,'' Moody's Senior Vice President Thomas Byrne said in the statement. He said the government may be able to balance its budget by 2011 or sooner.

Greece, Chile

Standard & Poor's raised Japan's debt rating to AA, its third highest, on April 23, citing the government's progress in cutting the debt. Moody's rating is three levels behind S&P's.

A one-notch upgrade by Moody's to A1 would put Japan's rating on a par with Greece and Chile. Moody's, which cut the rating two notches to A2 in May 2002, changed its long-term credit outlook for Japan to positive in June last year.

Moody's yesterday put South Korea's ratings on review for upgrade, citing a favorable economic outlook and progress in talks with North Korea on dismantling its nuclear weapons program.

Japan needs to maintain economic growth as the population declines and the debt hovers around 150 percent of gross domestic product. The cost of servicing the debt alone will amount to 21 trillion yen this fiscal year, or a quarter of total spending.

Abe is betting growth will create enough revenue to balance the budget and has put off debate on whether to raise the sales tax until after this month's Upper House election.

Bond Sales

Members of former Prime Minister Junichiro Koizumi's administration said the tax would have to be doubled to 10 percent to pay for mounting social security costs. Japan's 5 percent sales tax is the lowest among the 30 members of the Organization for Economic Cooperation and Development.

Byrne said the government may be able to achieve a primary balance of the budget by 2011 or sooner. Abe cut new bond sales by a record and trimmed public works spending in his budget for the year ending next March.

The Finance Ministry estimates the primary deficit, which excludes bond sales and interest payments, will drop to 4.4 trillion yen this fiscal year from 11.2 trillion yen last year.

Reducing the debt is likely to become harder as the Bank of Japan raises interest rates, the lowest among major economies, and the aging population swells welfare costs. The bank doubled the key overnight lending rate to 0.5 percent in February and wants borrowing costs to increase further to avoid excessive investment and sustain the economy's longest postwar expansion.

Monetary Policy

``Monetary policy will need to continue to remain accommodative'' to spur growth and therefore repay the debt, Byrne said. Japan's fiscal condition remains ``vulnerable to rising interest rates or other macroeconomic shocks.''

The Ministry of Finance in December estimated a one percentage-point increase in the yield on the 10-year bond will increase the cost of servicing public debt by 1.6 trillion yen.

The ratio of the debt to gross domestic product will drop to 148 percent by March 2008 from 150 percent, assuming the economy expands 2 percent, the ministry said in December. Japan's debt climbed 0.3 percent to 834.4 trillion yen in the first quarter.

Moody's also placed the rating of Tokyo's metropolitan government debt on review for upgrade. The capital's Aa2 local currency rating is the third highest.

Moody's reduced Japan's debt rating from its highest Aaa rank in November 1998, the year the country was struck by a bout of deflation. It followed with three additional reductions, most recently to A2 in May 2002.