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Japan: How far down?
by Elson Boles
19 April 2002 21:44 UTC
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Two articles from the Financial Times enclosed.  One on Japan's credit rating now put by Standard and Poor at "one notch below Chile,"  and the other entitled, "Japan angered by IMF's economic prescription" which underscores the inability of the domestic regime to reform.  What Ronald Dore once referred to as "Flexible Rigidities" may be less flexible than we thought.
Blow to Japan as credit rating cut
By Arkady Ostrovsky and Christopher Swann
Published: April 15 2002 19:32 | Last Updated: April 16 2002 11:24


The government of Junichiro Koizumi, the Japanese prime-minister, was dealt another blow by Standard & Poor's on Monday when the rating agency cut Japan's rating by one more notch, citing disappointment over the pace and scope of structural reforms.

S&P lowered Japan's foreign and local currency credit rating from AA to AA- and retained its negative outlook for the country signaling more downgrades were possible. The downgrade puts Japan at the same level as the Czech Republic and one notch below Chile.

This is the third downgrade of Japan's foreign currency credit rating by S&P since November 2001, when the country lost its AAA rating.

It is likely to cause further concern to policymakers around the world who fear that a continued slide in the Japanese economy could lead to global deflation.

Takahira Ogawa, head of the Asian sovereign team at S&P said: "We had hoped that the Junichiro Koizumi administration would press for private-sector and governmental reform but, given the government's falling popularity and the problems that have beset key ministers and aides, S&P has lowered its expectations."

The agency said it expected Japan's deficit to remain at 8 per cent for several years, which, coupled with weak economic growth "makes Japan's fiscal stance unsustainable."

S&P also criticised a recent report by Japan's Financial Services Agency, the regulator, for its limited scope and remedies.

It warned that Japan's financial system required further capital injections, in order to be able to expand lending. S&P also said the current government was unlikely to trim pension and health entitlements, or to open protected sectors of the economy, such as agriculture or retailing, to greater foreign competition.

Monetary policy was one avenue left to policymakers to change the government's debt trajectory, according to the agency. A prolonged period of negative real interest rates could stabilise the government's debt levels. This could be achieved by greater monetary easing, S&P said.

"The Bank of Japan is slated to monetise 40 per cent of the government's fiscal deficit in the year to March 31, 2003," Mr Ogawa said. "Such monetisation could change price expectations and, coupled with strong home market bias of Japanese investors and depositors, could set the conditions for modest real losses on financial fixed income and banking assets."

The downgrade hurt the yen, allowing the dollar to climb from 131.5 to 132.2. The yen recovered some ground and by the middle of the New York session the dollar was trading around 131.9.

In spite of this knee-jerk fall, analysts said there was unlikely to be any lasting damage to the yen. Foreign ownership of Japanese bonds is relatively limited, approximately one-eighth of the overall market, compared to one-third for US. Analysts said that Japan's rating had not yet fallen low enough for fund managers to boycott Japanese government bonds.

Japan angered by IMF's economic prescription

By Bryan Shih in Tokyo
Published: April 19 2002 10:29 | Last Updated: April 19 2002 10:51


Japan on Friday accused the International Monetary Fund of "meddling" in Japan's domestic affairs, and warned it would protest at the G7 meeting in Washington this weekend.

"Recent remarks by the International Monetary Fund and economists are rather unexpected in our view," said Masajuro Shiokawa, Japan's finance minister, "and I will protest against that at the upcoming meetings".

"It amounts to meddling with domestic affairs," he added.

The IMF's biannual World Economic Outlook released on Thursday, described Japan's economy is a matter of "serious concern" for global economic health, and suggested Japan issue a supplementary budget and take stronger measures to halt deflation.

A supplementary budget would run directly against the government's fiscal consolidation efforts under Junichiro Koizumi, Japan's prime minister, who promised to level Japan's mountain of debt by restricting the issuing of new government debt.

The IMF's prescription also adds another dent to Mr Koizumi's reformist image, recently battered by a series of political scandals and a falling popularity rating.

As such, publication left some analysts baffled. "I would think (the IMF) would be more aware of jeopardising Koizumi's reform plan," said Christopher Walker, economic analyst at Credit Suisse First Boston.

The report comes at a time when Japan is particularly sensitive to outside criticism, coming on the heels of a rating cut on Japanese government bonds by Standard & Poor's earlier in the week from AA to AA-, the lowest among the G7 industrialised countries.

Moody's Investors Service has warned that it could issue an even more severe ratings cut in the coming weeks, that could call in to question the investment grade of Japanese government paper.

Mr Shiokawa's remarks were echoed by Heizo Takenaka, economics minister, who said: "I think their call for an extra budget is out of focus."

Out of focus or not, Japan's strong criticism of the report could leave it in a difficult position in the future if the government wants to consider another supplementary budget, something it has done every year for the past decade.

"It seemed like they were trying to leave some wiggle room in that area," said Peter Morgan, economist at HSBC Securities, "so it's hard to see why they would react so strongly."

Elson Boles
Assistant Professor
Dept. of Sociology
Saginaw Valley State University
University Center
Saginaw MI, 48710

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