Down, down, down

Moody's Investors Service cut its rating on Japan's government debt by one notch to Aa3 on Wednesday, blaming a build-up of debt since the 2009 global recession and revolving-door political leadership that has hampered effective economic strategies.

While expected, the decision by Moody's put further pressure on Japan’s political and economic landscape, which has been damaged by the March 11 earthquake and tsunami, a surging yen and a slowing global economy.

Japan is preparing to elect its sixth leader in five years to replace unpopular Prime Minister Naoto Kan, who is under fire for his handling of the response to the March earthquake and tsunami and subsequent radiation crisis at crippled Daiichi nuclear power plant in the Fukushima prefecture.

'Regrettable'

Moody's had warned as early as May that it might downgrade Japan's Aa2 rating due to heightened concerns about faltering growth prospects and a weak policy response to rein in bulging public debt, already twice the size of its five trillion US dollar economy.

Moody's also downgraded some of the nation's major banks, including Mizuho Bank, Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corporation, local governments and other companies in the wake of its Japan move, helping send the Nikkei index down 1.07 percent.

Kan described the downgrading as "regrettable" while Finance Minister Yoshihiko Noda, a key contender in the race to replace Kan, defended the creditworthiness of Japan's bonds. "The smooth sales of Japanese government bonds at recent auctions show that confidence remains unshaken," Noda told reporters.

Not alone

The United States lost its top-tier AAA rating from Standard & Poor's earlier this month, and Moody's warned in June that it may downgrade Italy as Europe's sovereign debt crisis festers. Moody's new rating on Japan's debt is three notches below coveted AAA status, which Tokyo lost in 1998, but is still classified as high grade. Japan is now the same level as China, which surpassed it last year to become the world's second-largest economy, and one notch below Italy and Spain.

Japan's debt stands at around 200 percent of its GDP, after years of pump-priming measures by governments trying in vain to arrest the economy's long decline. Much of government spending is swallowed up by a social security system catering to a rapidly ageing population, while entrenched deflation and the feeble economy have made it hard for lawmakers to curb borrowing.

The March disasters and the ongoing crisis at the Daiichi nuclear power plant have plunged the economy back into recession and will force the government to borrow more to help fund reconstruction.

Author: Sarah Berning (Reuters, AFP)
Editor: Shamil Shams