Japan should concentrate on reform not the loss of its AAA credit ratings
Japan is singing the blues about the loss of its triple-A credit status. The vice-finance minister, Haruhiko Kuroda, is demanding an explanation from Moody's Investors Service and Standard & Poor's. Early indications are that no explanations will be forthcoming.
Japan lost its AAA local currency rating from S&P on 22 February, 2001, and the rating fell further on 28 November and 15 April, 2002. Moody's yanked its Aaa much earlier, on 23 July, 1998.
What really steams prime minister Junichiro Koizumi is that his country's rating is, as he says, 'lower than countries in Africa to which it provides foreign aid''.
Koizumi may be referring to statements coming from Moody's to the effect that it is thinking of cutting Japan's local currency rating two notches to A2, one notch below its rating for Botswana. Maybe Botswana should consider giving foreign aid to Japan? S&P rates Japan AA-, which puts it on a par with Malta and the Czech Republic. To put this in better perspective, among the eurozone countries, only Greece is rated lower than Japan.
But cheer up Japan, there's always Latin America. The best- rated Latin American country is Chile, rated A by S&P (three notches below Japan). Most of the rest of Latin America is rated in the B's and C's.
S&P has joined Moody's in signaling a possible further downgrade for Japan. Kuroda, in his letter to the rating companies, protests that 'defaulting on local-currency debt is unimaginable''. Really now? Is it so unimaginable given the rate of expansion in Japanese government debt, the size of Japan's continuing budget deficit and the inability of its government to stop both recession and future deflation.
The part about deflation is worth considering. As prices of goods and services sink, Japan's government becomes more indebted in real terms. It could go deeper into hock without even issuing any new debt.
Deflation is a wealth-transfer mechanism that moves value from debtors, in this case the government, to creditors, meaning the bondholders. But there is something else. This is local debt we're talking about. And there's a lesson from Argentina to remember.
One of the key factors in Argentina's demise was that the government, mostly under president Fernando de la Rua, crammed local debt into insurance companies, banks, pension funds and other institutions. It later forced these institutions to accept swapping the debt for new paper of grossly inferior quality and coupon.
The point is, governments have more latitude to abuse holders of local debt than they do investors in their international bonds. The locals have to take it; the foreigners have some leverage, by comparison. Practically speaking, the only people who disagree with the rating companies are Japanese officials. Everyone else is so negative about Japan's economic outlook that they expect Moody's and S&P to be tough.
Just listen to US Treasury secretary Paul O'Neill talk about Japan. Earlier this month, he addressed the Japan Society in New York. The speech was a kind of a pep talk for prime minister Koizumi, whom O'Neill advised to 'make it happen''. 'It'' means reform that will make Japan grow.
O'Neill next spoke of the emergence of China as the dominant economy in Asia. Then he said that if Japan doesn't act soon to get back on track, it will no longer be an 'engine for the world economy, it will be a boxcar''.
Maybe that sums it up. You don't give boxcars triple-A ratings.
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