Fitch cuts Japan debt rating to A+, outlook negative

Reuters: Fitch Ratings has downgraded Japan’s sovereign debt rating to A+ from AA and with a negative outlook, as the country struggles to push through much-needed tax hikes to rein in its huge public debt.

The downgrade reflects growing risks for Japan’s sovereign credit profile as a result of high and rising public debt ratios, said Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch. “The country’s fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk,” he said.

The dollar rose against the yen after the announcement, now moving around 79.74 versus the yen.

“Compared to past downgrades, the latest to a single-A status raises uncertainty about how foreign banks reassess risks and review their handling of JGBs,” Barclays Capital Japan Head of Japan Fixed Income Research C. Morita said.

“But I don’t expect an immediate spike in JGB yields as domestic banks that are dominant JGB holders are unlikely to react,” Morita added.

“A downgrade by Fitch alone may not impact much but similar action by other rating agencies may. Moody’s and S&P so far seem to have stable views on Japan’s ratings so they may not follow suit immediately. But this may change if Japan’s handling of tax hike plans stumbles.”

Rising social welfare costs for the ageing population has led to an expansion of Japan’s public debt which, at double the size of its economy, is the biggest among major industrialised nations.

Prime Minister Yoshihiko Noda has repeatedly said he was staking his political career on the tax plan, which he aims to pass during the current parliament session that ends in June.

But he has yet to secure the backing of the opposition which controls the upper house, and that along with the resistance within his own ranks makes the passage of tax bills far from certain.