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Fitch: Japan's Sovereign Creditworthiness at Risk

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Fitch: Japan's Sovereign Creditworthiness at Risk from Rising Government Debt Ratings
22 Apr 2010 4:51 AM (EDT)
http://www.fitchratings.com/creditdesk/p....

Fitch Ratings-Hong Kong/London/Singapore-22 April 2010: The Japanese government is one of the most indebted in the world. In the absence of sustained economic recovery and fiscal consolidation, government debt will continue to rise, placing downwards pressure on sovereign credit and ratings over the medium term, Fitch says today in a Special Report, "Just How Indebted Is The Japanese Government?''.

Japan's headline gross government debt reached 201% of GDP by end-2009, the highest ratio for any sovereign rated by Fitch. Public debt sustainability is the central sovereign credit issue facing Japan, whose Long-term local currency Issuer Default Rating (IDR) of 'AA-' is one notch below the Long-term foreign currency IDR of 'AA', uniquely among high-grade sovereigns. The lower local currency rating reflects the fact that all government debt is denominated in Yen and Japan's net external creditor status.

The ratings remain supported by low government debt yields, reflected in a budgetary debt service burden that is not especially high as a share of GDP, and by financing flexibility afforded by access to a large pool of domestic savings. The sovereign was a net external creditor to the tune of 15% of GDP at end-2009; but under Fitch's forecast of rising government debt ratios, sovereign creditworthiness is set to deteriorate.

In the near term, the Japanese government's funding prospects are further supported by ample banking-sector liquidity and by weak private-sector demand for credit. However, the slow but steady drop in the savings rate could eventually undercut the sovereign's ability to fund itself domestically at low nominal yields, leaving it more exposed to interest-rate and refinancing risks.

Fitch explored some scenarios for Japan's public debt path using a simple debt dynamics model, and one possible development is that Japan's government debt ratios could decline if positive nominal GDP growth were restored. However, upwards pressure on Japan's ratings is unlikely without a sustained drop in government debt ratios consistent with a return to nominal GDP growth and meaningful fiscal consolidation.

The extent of Japan's government indebtedness is often a source of confusion and conflicting statistics. On a broader measure, net general government financial liabilities reached 97% of GDP by end-2009; while still high, is not significantly more than other similarly rated sovereigns. However, the value and liquidity of the government's financial assets is uncertain and on Fitch's measure that only nets off currency and deposits; net government debt is estimated to be equivalent to 184% of GDP, still the highest of any rated sovereign.

Fitch estimates the share of Japanese government debt owed to other public sector creditors at around 53% on the latest available numbers, including the postal savings and insurance systems, which partly mitigates concerns over the high level of the debt and reduces Japan's exposure to 'confidence shocks'. Nonetheless, on whichever measure is adopted, Japan's government is amongst the most indebted and the key feature of previous rating downgrades - the adverse debt dynamics and steady rise in the debt ratio - remains the case, Japanese government debt will continue to rise bringing downwards pressure on Japan's sovereign creditworthiness and ratings over the medium-term.

Applicable criteria 'Sovereign Rating Methodology', dated 16 October 2009, are available on www.fitchratings.com.

Additional information is available on www.fitchratings.com.