Committee for a Responsible Federal Budget

Japan's Credit Rating Cut by Standard & Poor's

Jan 27, 2011

In what is sure to be a wake-up call for the Japanese government, Standard & Poor’s cut Japan’s credit rating today for the first time in nine years. Japan, whose credit rating was downgraded from AA to AA-, faces a debt of 943 trillion yen ($11 trillion) - more than double of their annual economic output. Japan joins several other developed economies whose credit rating has recently been cut, including Portugal and Spain.

In their released statement, S&P cited deflation, Japan’s ageing population, and political inaction as factors in their decision, and said that the government “lacks a coherent strategy to address these negative aspects of the country’s debt dynamics”. They continued:

“The downgrade reflects our appraisal that Japan's government debt ratios--already among the highest for rated sovereigns--will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s. Specifically, we expect general government fiscal deficits to fall only modestly from an estimated 9.1% of GDP in fiscal 2010 (ending March 31, 2011) to 8.0% in fiscal 2013. In the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation program is implemented beforehand.”

The cut in Japan's credit rating could increase interest rates and make fiscal reform more difficult, as financing the country's debt could become more expensive, and gives Japan the same rating as China - a country whose rating was just updated by S&P in December.

As more nations around the globe confront increasingly serious fiscal crises, the need to come up with a serious plan to take control of our debt and deficit - and act on it - becomes more apparent. We have seen the drastic steps that must be taken when countries wait to enact fiscal reform until a crisis has taken hold (Greece, anyone?). The question is whether our government can manage to agree on a way to fix our budget, before it is too late.