Level with China

27 January 2011



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S&P Downgrades Japan's Credit Rating

Twenty five years ago, Japan, Inc. was the great threat the the world economic order. Earlier today, Standard & Poor's, the rating agency, dropped its AA rating on Japanese debt to AA-, four notches down from the highest AAA. The People's Republic of China has a similar rating. A couple of days ago, Finance Minister Yoshihiko Noda said that the debt load is so heavy that the country cannot depend on bond sales to cover revenue shortfalls. The only permanent way out of this mess for Japan is the kind of sustained economic growth that has eluded it for the past two decades, and that does not look like it will happen. How the mighty have fallen.

The Japanese government took the downgrade in stride while trying to put a happy face on things. Bloomberg reported, "Economy and Fiscal Policy Minister Kaoru Yosano said it's 'regrettable that Standard and Poor's has downgraded Japan's credit rating.' The prime minister's 'commitment to fiscal reform hasn't been fully understood' and the government needs to step up its efforts to increase revenue and pare debt, he told reporters."

The market was having none of it. Deutsche Bank said that the cost of protecting against a Japanese government default rose to 84 basis points, a 4 bp rise, on credit default swaps. That is the biggest increase since November 30. This dropped the yen by 1% against the US dollar, Nevertheless, Japan still have quite low borrowing costs. The yield on a 10-year Japanese government bond is a paltry 1.25%.

As Herb Stein said, "if something can't go on forever, it won't." Japan now has a debt to GDP ratio of almost 2:1. That is not a typo -- the Japanese have a national debt of ¥943 trillion (roughly US$11.4 trillion). The government needs more revenue, that is obvious. An increased national consumption tax has been proposed, but that will stifle demand in an economy that is already suffering from structural anemia. Although it grew at a 3.1% rate in 2010, the Japanese Cabinet Office expects growth of just 1.5% this year. What Japan needs is 3-5% growth for about a decade.

The same Bloomberg article quoted Azusa Kato, an economist at BNP Paribas in Tokyo,as saying, "I hope this [the downgrade] serves as a warning for the government, they have absolutely no sense of crisis. Once bond yields spike and the fire is lit, the amount needed to finance Japan's borrowing needs is going to jump and it's going to be too late." Mr. Kato is right. The question remains how to grow an economy locked in a deflationary spiral of 20 years' duration. Answers on a postcard please to: Cabinet Secretariat, Cabinet Public Relations Office, 1-6-1 Nagata-cho, Chiyoda-ku, Tokyo 100 - 8968, Japan.

© Copyright 2011 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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