On May 22nd Fitch Ratings downgraded several Japanese ratings. In particular, Japan’s public rating was cut from с ААA down to АA+. Moreover, the forecast is negative, which makes the situation more complicated.
For some experts, this decision came as a surprise while others had anticipated the rating cut.
Can a country’s high public debt be a priori considered as the reason to downgrade its public rating? What will be the consequences for Japan and its national currency?
Peculiarities Of Japanese Debts
According to , Japan’s huge public debt was the major reason for the rating cut:
In 2011, the Japanese public debt reached 229.8% of GDP (for the sake of comparison, Greece’s debt was equal to 160.8% of GDP). Therefore, Japan is the world’s largest debtor.
In late 2012, Japan’s public debt is expected to reach 239% of GDP.
reports that:
· In late 2011, Japan was the world’s 2nd largest debtor in absolute terms ($13,486 trillion), thus yielding only to the USA ($15,537 trillion).
· In 2011, Japan’s public dent grew by 14%. This is definitely a huge increase, but not the biggest one (Spain - 20%, Brazil - 18%, Great Britain and Switzerland - 17%, Ireland - 16%).
· Nevertheless, Japan is the world’s leaders in terms of the public debt per capital ($105,5K).
· Since the latest global economic crisis, Japan’s public debt has grown by 61%.
However, Japan is a unique country (in terms of public debts s well):
· Most Japanese bonds (95%) are purchased by local public companies and institutions (Government Pension Investment Fund, Japan Post Bank etc). Foreign bondholders account only for 5%.
· Private lenders account for almost 50%, public companies hold 40% of Japan’s debt.
· Japan’s is the 2nd largest holder of US bonds (after China).
· It is no surprise that Japan is number 5 in terms of external public debt ($2,719 trillion). In 2011, it was just 46% of GDP.
Japan’s financial sector has been under the threat of deflation since 2001. The pace of its economic growth has been very low since the 1990s. Two decades ago, Japan’s public debt was equal to 52% of GDP. The 2012 budget suggests that 56.2% of public spending will be implemented at the expense of borrowed funds.
If Japan wasn’t the world’s 3rd largest economy, rating agencies would cut its ratings to junk. So far, the Japanese has been a united nation willing to support the national economy through bond purchases. However, it is not clear whether the Japanese will keep purchasing bonds as most of them haven’t yet recovered from the devastating consequences of last year’s earthquakes and tsunamis. Moreover, the Japanese authorities cannot count on foreign investors as the 1% bond yield doesn’t look tempting. Alternatively, increasing interest rates means pushing the country closer to default.
Japanese Yen: Near-Term Prospects
According to , the Japanese Yen is forming a long-term downtrend aimed at strengthening against the US Dollar. USDJPY has finished forming a bullish sub-wave, probably В(С),inside a major downswing - wave А/В. A break and consolidation below 78.99 will continue the downtrend in the form of wave А(С)/С. The closet major levels of support are located at 78.85, 78.32, 77.64. If there is a break above 80.14, it will suspend the downtrend, thus initiating an upswing – wave А/В. If this is the case, 80.36 will become the closest major level of resistance:
Is It Time For Another Japanese Economic Miracle?
According to experts, the very attempt to initiate another economic miracle will become a miracle in itself. The thing is that Japan has multiple problems:
· Apart from astronomic debts, one of the major issues is the demographic problem. The Japanese nation is currently aging. 25 years ago, only 12% accounted for the people over 65 years old. Today, it is 23%. The average age is 45 years (in the USA, it is 37 years). By the way, the population is rapidly shrinking. In 10 years, the country’s population is expected to decrease by 3.5% (4.4 million people). By 2050, it is expected to shrink by 25%.
· Another problem is Japan’s budget deficit. Next financial year, the budget deficit is expected to touch 10%.
· Debt liabilities. This year, Tokyo is obliged to pay off $3 trillion of debts. Yet, the figure will be growing every year.
· The public debt is expected to decline only in 2021.
· Energy dependence. 30% of Japan’s energy capacity was affected by last year’s earthquakes and tsunamis. Japan’s import of energy carriers accounts for 95% of its energy needs. Now the country is forced to boost the import amid higher energy prices. On top of it, the Japanese authorities decided to abandon nuclear energy after the Fukushima meltdown, which only increased the country’s dependence on the import of oil, natural gas and coal.
· The GDP growth seen in Q1 2012 looks confusing. It is mainly based on the recovery works aimed at restoring the Japanese infrastructure after the devastating natural disasters. The OECD thinks this is a temporary phenomenon, which is insignificant for the Japanese economic growth.
· Japan keeps losing its major trump card – external trade surplus. Even the external trade with China has reached parity.
· The authorities are planning to solve some of the problems by increasing the consumer tax. However, there is strong opposition in the parliament and the ruling party itself. Therefore, the policy is questioned.
According to Angel Gurría, Secretary-General of the OECD, the Japanese do not understand the real depth of the crisis in order to start implementing efficient fundamental reforms.
That is why more investors start being concerned about the Japanese Yen, which used to be a “safe haven” asset, and about the entire global financial system…
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How will the rating cut influence the Japanese Yen?
