Bloomberg News

Noda Says Japan Must Heed Lessons of Europe Credit Downgrades

January 16, 2012

Jan. 16 (Bloomberg) -- Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.

Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.”

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.

Japan’s government, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.

“The proposed increase in the consumption tax to 10% would not be enough to put the public finances on a sustainable track,” David Rea, a Japan economist at Capital Economics Ltd. in London, wrote in a report last week. “A larger increase is needed, and soon, but is highly unlikely without a specific mandate from the electorate as support from the opposition and even some elements of the ruling party is non-existent.”

Monitoring Yields

The finance ministry is closely monitoring Japanese bond yields, Finance Minister Jun Azumi said on a Fuji Television Network Inc. program yesterday. He reiterated Noda’s statement that Japan should view Europe’s debt crisis as an issue it might face in the long term without fiscal reform.

France’s loss of its AAA rating probably won’t have any immediate effect in Japan as domestic banks’ holdings of French bonds aren’t large, Azumi said in Tokyo yesterday, according to Kyodo News.

About 57 percent of the public opposes raising the sales tax, and the approval rating for Noda’s cabinet fell to 29 percent from 31 percent last month, the Asahi newspaper said yesterday, citing its own survey. The Nikkei newspaper said Noda’s public approval rose 1 percentage point to 37 percent after a cabinet reshuffle last week, while the Yomiuri newspaper reported a decline in public approval to 37 percent from 42 percent.

‘Worse and Worse’

Japan’s finances are “getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he’s closer to lowering Japan’s credit rating, he said it “may be right in saying that we’re closer to a downgrade.”

S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a “comprehensive approach” to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March’s record earthquake.

Aging Population

Japan’s aging population is also weighing on Noda’s struggle to achieve fiscal health. Social-security expenses have more than doubled in two decades and will account for 52 percent of general spending for the year starting in April, according to a budget proposal the cabinet approved last month.

France and Austria lost their top credit ratings last week in a string of downgrades that left Germany with the euro area’s only stable AAA grade, as S&P warned that crisis-fighting efforts are still falling short.

France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said in Frankfurt. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also among the nine nations downgraded.

On Jan. 12, Italy auctioned 12 billion euros in treasury bills as borrowing costs plunged in the country’s first debt sale of the year. The result may help ease investor concern about Italy’s ability to finance Europe’s second-biggest debt, which pushed the yield on the country’s benchmark 10-year bond above the 7 percent level that led Greece, Ireland and Portugal to seek bailouts.

The International Monetary Fund has said a gradual increase of Japan’s sales tax to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.”

“No one is saying we don’t need sales-tax hikes in the future,” Deputy Prime Minister Katsuya Okada said during a program by public broadcaster NHK yesterday. “If you’re a politician, you know the fiscal situation.”

--With assistance from Takashi Hirokawa and Norie Kuboyama in Tokyo. Editor: Terje Langeland, Jim McDonald

To contact the reporters on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net


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