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S&P: Outlook On Japan Revised To Negative On Diminishing Economic Policy Flexibility; Ratings Affirmed At 'AA/A-1+'

January 26, 2010 | Standard & Poor's

SINGAPORE (Standard & Poor's) Jan. 26, 2010--Standard & Poor's Ratings
Services today revised to negative from stable its outlook on the 'AA'
long-term rating on Japan. At the same time, we affirmed our 'AA' long-term
and 'A-1+' short-term local and foreign currency sovereign credit ratings on

The outlook change reflects our view that the Japanese government's
diminishing economic policy flexibility may lead to a downgrade unless
measures can be taken to stem fiscal and deflationary pressures. At a
forecasted 100% of GDP at fiscal yearend March 31, 2010, Japan's net general
government debt burden is among the highest for rated sovereigns. Moreover,
the policies of the new Democratic Party of Japan (DPJ) government point to a
slower pace of fiscal consolidation than we had previously expected. Combined
with other social policies that are not likely to raise medium-term trend
growth and with persistent deflationary pressures, we forecast that Japan's
net general government debt to GDP will peak at 115% of GDP over the next
several years.

The affirmation of the 'AA' sovereign ratings on Japan rests on the country's
strong net external asset position, the yen's status as a reserve currency,
the financial system's resiliency throughout the recent global recession, and
the economy's diversification. We believe that these strengths will keep the
government's rating in the 'AA' category, even if further fiscal consolidation
leads to a one notch downgrade.

A strong net external asset position and the yen's key international currency
position provide ample external liquidity and good access to global capital
markets. Japan is the world's largest net external creditor in absolute terms
with projected net assets of an estimated 309% of current account receipts at
the end of 2009. The country's current gold and foreign exchange reserves of
over US$1 trillion are second only to China's. Standard & Poor's expects
Japan's net external assets to rise further in the coming years due to
continued current account surpluses.

The ratings on Japan could fall by one notch if economic data remain weak and
measures to boost medium-term growth are not forthcoming, given the country's
high government debt burden and its weak demographic profile. Standard &
Poor's will be looking for signs of government policy toward fiscal
consolidation in the update of its medium-term fiscal plan, due to be released
in the first half of 2010. Additional policy initiatives may also be revealed
after the upper house elections in July. If on the other hand we conclude that
government policies, either on the fiscal side or structural reform side, will
moderate the government's debt trajectory, the ratings could stabilize at the
current levels.

Ratings List

Outlook Revised

To From
Foreign currency AA/Negative/A-1+ AA/Stable/A-1+
Local currency AA/Negative/A-1+ AA/Stable/A-1+

Ratings Affirmed

Foreign Currency AA/A-1+
Local currency AA/A-1+

Company: Japan

Full company nameJapan
Country of riskJapan
Country of registrationJapan


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