Reuters: US Dollar Report: Fitch Affirms Japan at 'A+'; Negative Outlook

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Fitch Affirms Japan at 'A+'; Negative Outlook May 16th 2013, 09:57 Thu May 16, 2013 6:05am EDT May 16 (Reuters) - (The following statement was released by the rating agency) Fitch Ratings has affirmed Japan's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A+' with a Negative Outlook. The Short-term IDR has been affirmed at 'F1+'. The Country Ceiling has been affirmed at 'AA+'. The affirmation of Japan's sovereign ratings in part reflects the greater commitment of the Bank of Japan and government to bring to an end two decades of economic stagnation and deflation. If successful and underpinned by structural reform to raise potential growth along with a credible medium-term deficit reduction plan, Japan's adverse public debt dynamics could be corrected. The Negative Outlook reflects the uncertainty over the success of these efforts to shift the economy onto a more positive real and nominal growth path as well as the absence of more detailed reform and fiscal consolidation programme. KEY RATING DRIVERS The affirmation of the ratings with Negative Outlooks reflects the following key factors: - Japan's public finances are its key rating weakness. Gross general government debt (GGD) was 230.5% of GDP by end-2012, by far the highest of any rated sovereign. Japan is less of an outlier in terms of net financial liabilities (134% of GDP at end-2012) given its unusually large stocks of assets, including the world's second-biggest stock of official foreign reserves of USD1,268bn (end-2012). However, on any measure Japan's public indebtedness is high and is set to rise strongly, eroding the credit profile. - Japan's budgetary position has worsened sharply even relative to other fiscally-challenged high income sovereigns since the onset of the global financial crisis in 2008 on both a headline and cyclically-adjusted basis. Fitch's current base case projection is for the GGD/GDP ratio to stabilise only by FY20. Fitch currently assesses this base case as likely to be consistent with a downgrade of the sovereign ratings, most likely by one notch, over the next two years. The agency would need to become more confident that the primary deficit was set to decline in a sustainable manner over time before considering restoring the ratings to Stable Outlook. - The key credit development since the ratings were downgraded to their present level with Negative Outlook in May 2012 has been the shift in economic policy under the newly-elected government of Prime Minister Shinzo Abe since December 2012. "Abenomics" consists of fiscal stimulus, monetary easing in the context of a new 2% inflation target for the Bank of Japan (BoJ), and structural reforms to enhance private investment. This aggressive plan has led Fitch to raise its growth forecast for 2013 to 1.6% from 1.5% at the time of the May 2012 review despite a downwards revision to global growth to 2.2% from 3% over that period. The stimulus is positive for growth in the short term as evidenced by the strong Q1 GDP print of +0.9% qoq (seasonally adjusted). Fitch regards the stimulus as a powerful demonstration of Japan's fundamental credit strength of policy flexibility arising from having a central bank issuing one of the world's major reserve currencies. The new policy approach has the potential to become a positive rating driver if it succeeds in raising demand sustainably over time, unlocking higher trend nominal and real GDP growth. - Japan's public debt dynamics and fiscal solvency have been undermined over time by weak real GDP growth and nominal GDP stagnation. Real GDP growth averaged just 0.85% pa over 1992-2012. Nominal GDP of JPY475.9trn in 2012 was below the 1992 level of JPY480.8trn, reflecting persistent mild deflation. Prolonged deleveraging by corporates has contributed to weak headline growth. One measure of the success of the new economic policy strategy will be whether corporates can be encouraged to invest more and pay higher nominal wages, thereby boosting growth over time. - Despite weak public finances, Japan's sovereign retains exceptional funding flexibility. The yield on newly-issued 10-year Japanese government bonds has fallen to 0.67% on average in 2013 to date, against 0.86% in 2012. Average maturity of the debt stock (excluding short-term instruments) has lengthened to seven years three months by end-2012 from six years and seven months at end-2010. Japan's sovereign funding flexibility stems ultimately from the deep domestic Japanese savings pool and the strong apparent "home bias" of Japanese investors. Some 42% of the marketable debt stock is held within the broader public sector against just 8.7% held by non-residents (end-2012). Fitch does not expect Japan's sovereign funding conditions to unravel over the medium term. However, the longer debt ratios remain on an upwards path, the greater the risk of a shock to funding conditions that would adversely affect sovereign solvency. - The BoJ expects to absorb about 70% of new JGB issuance in FY13 and FY14 (fiscal years April-March), contributing significantly to the strength of sovereign funding conditions. The BoJ intends to double the monetary base to 55% of GDP by end-March 2015, which is beyond the scale of quantitative easing implemented so far by other major global central banks. Fitch believes the medium-term outlook for inflation and interest rates has become more uncertain, although there is little sign as yet of concern in financial markets or the public more broadly that inflation is set to accelerate sharply. The agency judges the risk of inflation expectations becoming unhinged, leading to a sharp rise in government debt yields that could adversely affect sovereign solvency, as currently remote. From a sovereign credit perspective, Fitch believes the risk is outweighed by the prospect of stronger nominal GDP growth and stronger sovereign debt dynamics over time if the policy change works. - Japan's structural fundamentals, including one of the world's most advanced, high-income and diversified economies and high standards of governance and quality of public institutions, as well as the policy flexibility already mentioned, would sit comfortably among the world's most highly-rated sovereigns. Greater confidence that fiscal stabilisation was in prospect could eventually see the ratings return to a level more consistent with Japan's credit fundamentals in the 'AA' category. - Important policy announcements are expected over the second half of 2013 including a new fiscal consolidation strategy in the middle of the year and clarification of plans on structural reform. Evidence will also build over time of the economy's response to "Abenomics". Fitch stresses the affirmation of Japan's ratings with Negative Outlook should not be read as discounting the new government's policy strategy. The agency anticipates a further review of Japan's ratings when further detail becomes available on the government's fiscal consolidation and structural reform plans later in the year. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings, most likely by one notch, over a one-two year horizon:- - Failure to implement the currently-legislated increase in the consumption tax due to take effect in April 2014, without alternative measures of similar importance or without adequate justification from economic developments - Failure to lay out a credible and coherent fiscal consolidation plan that would narrow the primary budget deficit sustainably over the medium term - Mounting evidence that the economy was failing to respond to the "Abenomics" treatment of monetary and fiscal stimulus plus (as yet, sparsely detailed) structural reforms and reverting to a trend of essentially zero nominal GDP growth The current rating Outlook is Negative. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, future developments that may, individually or collectively, lead to a stabilisation of the Outlook include:- - A fiscal consolidation strategy whose content increased Fitch's confidence that the primary budget deficit will be reduced in a sustainable manner over the medium term - Evidence that the economy's trend rate of real and nominal GDP growth had improved relative to the experience since 1992. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions. - Fitch assumes Japanese sovereign funding conditions do not deteriorate substantially and for a prolonged period. A sharp and sustained increase in nominal effective yields on government debt could endanger Japan's sovereign solvency and see the ratings downgraded by more than one notch if it occurred, but the agency considers this scenario to be unlikely. - The ratings assume there is no significant crystallisation of regional geopolitical risk, for example an armed conflict between Japan and China or an outbreak of war on the Korean peninsula - The ratings further assume there is no sharp and sustained escalation in global economic and financial volatility over the forecast period, for example an event with an impact on the scale of the collapse of Lehman Brothers Link this Share this Digg this Email Reprints

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