Japan grills Moody's over downgrade


Japanese exports to the U.S. have been picking up in recent months

Staff and wire reports

TOKYO, June 12 -- Ratings agency Moody's Investors Service defended its recent downgrading of Japanese debt, under tough questioning in Japan's parliament Wednesday.

Moody's last month cut Japan's local currency credit rating for long-term debt by two notches to A2 from Aa3, taking it to the lowest level among leading economies.

Moody's lead analyst for Japan and Asia, Thomas Byrne, told a parliamentary committee that Japan's credit ratings would continue to reflect rising risks in the absence of a turnaround in debt policy.

Japan's public debt is almost 1.4 times its gross domestic product, the largest in the industrial world.

Byrne's testimony came after official figures released last week showed Japan's recession-hit economy grew a faster than expected 1.4 percent in the March quarter over the previous quarter(Full Story).

That is an annualized rate of 5.7 percent and follows three straight quarters of contraction.

One-off spike


Analysts warn the latest GDP figures could be a one-off spike

There has also been a recent pickup in consumer spending, and in exports of motor vehicles and electronic products to the key U.S. market.

But analysts warn the GDP figures could be just a one-off spike. They say the consumer spending figures are distorted and the sustainability of any recovery is in question.

Byrne appeared Wednesday before the Lower House Fiscal and Financial Committee meeting, where he was questioned by Kiyoshi Nakano of the ruling Liberal Democratic Party.

Nakano asked why Japan was rated so lowly, given its status as the world's second largest economy with high household savings and the world's largest foreign exchange reserves.

"Although we recognize that Japan may be able to sustain a very high domestic debt burden by world standards, we believe there is a point for any nation beyond which debt levels become unsustainable," Byrne replied, according to Reuters news agency.

He said it was not possible to know in advance when debt reached an unsustainable level or what the consequences would be but that the risk of a crisis increased as the debt level rose.

Rising risk

"Without evidence of a turnaround in the country's fundamental public debt dynamics, the ratings will reflect such rising risks over time," he said.

IFR Asia Pacific chief economist George Worthington noted in a commentary earlier this month that it was true there was no chance of Japan defaulting on its yen obligations(Full Story).

He said the government could simply print more money and inflate its way out of the situation.

"That, in our view, is the most likely eventual route, and for holders of yen bonds -- mostly local savers and institutions -- that might prove no less troubling than an outright default."

He said it was this risk that the Moody's downgrade reflected.

About 95 percent of Japanese government bonds are held by local investors, mostly financial institutions.

Japanerse households have financial assets of 1400 trillion yen (about $11.2 trillion).

But Byrne said this situation could not last forever, given the rapidly ageing population.

"A decline in the savings surplus will pose a long-term risk if public debt is not brought under control," Byrne said, according to Reuters.

"We do not expect crisis...The government has time to seek a remedy to its growing debt problem," he said.

Byrne said the conclusion was that the government's current and anticipated policies would not be enough to prevent the continued deterioration of Japan's domestic debt position.

Finance Minister Masajuro Shiokawa said he still could not see why that should reflect on the credit rating of Japan's bonds.

"These (ratings reports) are meaningful in that they analyze Japan's economic situation. But what I cannot understand is why this is linked to the credit rating of government bonds."