Japan’s credit rating was downgraded by Standard & Poor’s on Wednesday, citing the outlook for continued economic deterioration in the coming years.
Sovereign credit ratings on Japan were lowered to ‘A+/A?1’ from ‘AA?/A?1+’, the rating agency said in a statement. The outlook on the long-term rating is stable, it added.
“Economic support for Japan’s sovereign creditworthiness has continued to weaken in the past three to four years,” S&P said.
Further, S&P said the likelihood of an economic recovery in Japan strong enough to restore economic support for sovereign creditworthiness has diminished. This is reflected in the sharp depreciation in the yen exchange rate, poor average growth and persistently weak price trends.
“Despite showing initial promise, we believe that the government’s economic revival strategy dubbed “Abenomics” will not be able to reverse this deterioration in the next two to three years,” the agency noted.
The country’s aging population and persistent deflation are exacerbating its very weak fiscal position, S&P said. However, this is balanced by a strong external position, relatively prosperous and diversified economy, political stability, and stable financial system.
The Bank of Japan’s monetary policy efforts are supported by the yen’s reserve currency status that reduces Japan’s vulnerability to large fluctuations in international capital flows, the agency noted.
S&P said the stable outlook reflected expectations that modest growth and stabilization of price levels will slow an increase in government indebtedness over the next two years and eventually stabilize it.
“We could raise the sovereign ratings on very significant improvements in the government’s fiscal performance, likely brought on by the economy returning to low and sustained inflation accompanied by stronger growth,” S&P said.
“We could lower the sovereign ratings on indications that the government debt burden could rise more significantly than we currently expect, potentially due to continuously weak economic growth and prices trends.”
On Tuesday, the Bank of Japan retained its stimulus program even as the domestic economy contracted in the second quarter, casting doubts on its ability to achieve its inflation target the next year. The central bank last expanded its stimulus program in October 2014, when a decline in crude prices exerted pressure on its ability to achieve inflation target.
Last week, Prime Minister Shinzo Abe was re-elected unopposed as the leader of the ruling Liberal Democratic Party. He promised to lead the country out of deflation and create growth in a strong, future-oriented economy during his new term that last until September 2018.
The material has been provided by InstaForex Company – www.instaforex.com