The downgrade from Moody's isn't nearly as big a problem for Japan as the soaring yen

08/25/2011 3:19 pm EST


Jim Jubak

Founder and Editor,

A downgrade might actually help if it took the yen down a bit.

That’s not likely, though, as long as financial markets remain fixated on the risk of a global economic slowdown.

Yesterday, August 24, Moody’s Investors Service downgraded Japan’s government debt one notch to Aa3. Moody’s called that rating stable, meaning it thinks it unlikely that it will revisit the rating within the next 18 months. The move is Moody’s first downgrade of Japan’s debt since 2002.

Yesterday’s downgrade brings Moody’s credit rating to the same Aa3 rating as the company gives China. Standard & Poor’s lowered Japan’s credit rating to AA-, equivalent to Moody’s current rating, in January and has Japan under review for another downgrade. Fitch Ratings puts Japan at AA- with a negative outlook.

Nothing much as stopped the rise of the yen, though, and the Moody’s downgrade isn’t like to change that. The government last intervened in the currency market on August 4 by selling yen to try to stem its appreciation. But the yen, undaunted by the intervention, hit a postwar high of 75.95 to the dollar on August 19. It closed at 76.55 today in Tokyo.

Japan has the world’s second largest (after China) foreign-exchange reserves at $1.07 trillion, but the government doesn’t look like it’s about to rush to intervene in the currency markets again even though a higher yen is killing Japanese exporters and depressing a national economy that has contracted in each of the last three quarters.

Yesterday, for example, instead of intervening, the government announced that it would release $100 billion from foreign currency reserves to the state-run Japan Bank for International Cooperation for funding to aid exporters and spur purchases overseas. The one- year program is intended to encourage “the private sector to exchange yen-denominated funds to foreign currencies by supporting exports by small and mid-sized companies, securing energy resources and helping Japanese companies to purchase foreign businesses,” Finance Minister Yoshihiko Noda.

The government had to be seen to be doing something—Japanese exporters had built their financial plans for 2011 on exchange rates of 80 yen to the dollar or better—but even $100 billion in trade financing won’t be much of a boost to Japan’s economy.

All this comes as Japan gets set to welcome a new prime minister next week. Current Prime Minister Naoto Kan has said he will step down on August 26.

Japan’s government debt is projected to reach 219% of GDP in 2012 (without including borrowing for earthquake and tsunami recovery efforts.) But Japan continues to have some of the world’s lowest interest rate as domestic investors continue to buy government debt. Japan relies on overseas investors to buy less than 10% of its government debt. That’s likely to change over the next decade: The International Monetary Fund projects that outstanding government debt will exceed total financial assets owned by households in five to 10 years. That would increase the need for overseas cash to fund government debt.

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