Japan's finances questioned

Finance minister Shiokawa may have to pay more to borrow money

Japan's ability to repay its sovereign debts has been questioned by a leading international credit rating agency.

Whether there had been terrorist attacks or not, a downgrade was coming

Ron Bevacqua
Commerzbank chief economist

Standard and Poor's (S&P) has said it may downgrade the country's sovereign credit rating due to fears that the terrorist attacks on the US will lead to slower structural reforms in Japan.

The anticipated launch of a government reform plan, aimed at giving the ailing Japanese economy a much needed shot in the arm, could be delayed, S&P warned.

"With forecasts for economic growth now ratcheted down, the chances of a sharper downgrade of Japan's sovereign credit rating within the AA category has increased," the agency warned.

No worries

Japan's prime minister Junichiro Koizumi has rejected suggestions that the structural reforms will not be implemented as planned.

"Revitalisation of the Japanese economy is our duty for the rest of the world," Koizumi told the lower house of parliament, vowing to push ahead with the reforms.

"The government aims to normalise the banking industry's bad-loan problem after an intensive adjustment period of three years at the most," he said.

Japan will be on credit watch for a while before S&P decides whether or not to cut its rating.

"It is too early to judge as it is only a few weeks since the attacks and we do not know what is going to happen in the United States," said the agency's director of sovereign ratings, Takahira Ogawa.

A cut would make it more expensive for Japan to borrow money.

No surprise

Analysts were not surprised by S&P's warning.

"The Japanese economy was already under-performing," said Commerzbank chief economist Ron Bevacqua.

"Whether there had been terrorist attacks or not, a downgrade was coming," he said.

S&P cut Japan's long term debt rating ahead of 11 September due to the already slow implementation of economic reform.

Analysts now say Japan is suffering a recession.

"The Japanese economy will suffer negative economic growth," said Merrill Lynch fixed income analyst Masuhisa Kobayashi.

Moody's downgrade

S&P's rival, Moody's Investors Service, recently issued a warning of its own that it may downgrade Japan's yen-denominated debt.

"If Moody's downgrade further it would add to the negative outlook," Kobayashi said.