Standard and Poor's has downgraded its outlook on Japan's sovereign debt rating, warning that the huge cost of last month's devastating earthquake will hurt the country's already weak public finances without tax hikes.
It affirmed its long-term sovereign credit rating on Japan at AA minus - the lowest among the major agencies - but cut the outlook to negative from stable.
The ratings agency cut Japan's sovereign credit rating in January for the first time since 2002, saying the government had no plan to deal with its mounting debt while adding the administration's loss of an upper house majority had compounded the problem.
Public debt, already twice the size of the economy, is set to grow further as the country faces reconstruction costs following the March 11th earthquake and tsunami that could reach 50 trillion yen (€418 billion), S&P 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," the agency said.
S&P said changes in Japanese politics that adversely affect fiscal and economic policy could be the trigger for future action on the country's sovereign rating.
However, the country's deepest crisis since World War Two has not healed rifts between the government and the opposition, whose majority in the upper house stands in the way of fiscal reform.
In addition, prime minister Naoto Kan's deep unpopularity means that even within his party, he has little room for manoeuvre to shore up the country's public finances.
"This will put more pressure on the Japanese government to do something about revenue enhancement," Takuji Okubo, chief economist at Société Génerale, said.
Still, the action could help the government's case for fiscal reform, which centres on raising the 5 per cent consumption tax - something acknowledged by Japan's finance minister.
"Fiscal reform is something we cannot avoid," the minister, Yoshihiko Noda, said. "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."
Japanese sovereign credit default swaps were 1 basis point wider at 77 basis points after the S&P announcement, but they remain well off post-quake peaks near 120 basis points and a few basis points tighter than just before the disaster.
Reuters
