"We had hoped that Junichiro Koizumi Administration would press for private-sector and governmental reform but, given the government's falling popularity and the problems that have beset key ministers and aides, Standard & Poor's has lowered its expectations in three key areas," said Mr. Takahira Ogawa, head of the rating agency's Asian sovereign ratings team.
"First, we now expect Japan's general government deficit to remain in the 8% range for several years; this, coupled with continued weak growth prospects, makes Japan's fiscal stance unsustainable," Mr. Ogawa said. "Second, we were disappointed in the Financial Services Agency report of April 12, 2002, which was limited in scope and proposed remedies," he added. "Current levels of provisioning against net impaired assets, either on a reported basis or on an internationally comparable basis, are inadequate. The financial system thus requires further capital injections-be it from shareholders or from the government after intervention-and, absent proper capitalization, the financial sector will be reluctant to expand lending, thus hurting growth and blunting monetary policy."
"Third," continued Mr. Ogawa, "the current government is unlikely to trim pension and health entitlements, or to open protected sectors (such as agriculture or retailing) to greater foreign competition in the near future." Standard & Poor's said that monetary policy remains the one avenue left to policymakers to curb the government's debt trajectory. A prolonged period of negative real interest rates could stabilize Japan's debt levels, and this third avenue, by far the least attractive of the three, could be achieved through the Bank of Japan's (BoJ) revised policy of greater monetary easing.
"The BoJ is slated to monetize over 40% of the government's fiscal deficit in the year ending March 31, 2003," said Mr. Ogawa. "Such monetization could change price expectations and, coupled with the strong home market bias of Japanese investors and depositors, could set the conditions for modest real losses on financial fixed income and banking assets," he added.
Standard & Poor's said that a strategy of shifting the burden of adjustment from the special interests that benefit from Japan's current pattern of public expenditure to its beleaguered savers carries risk-to political consensus, to capital account stability, to maintaining Japan's historic high savings rates-but with fiscal and structural adjustments excluded, it may be the sole remaining strategy to keep Japan's credit standing at the current level. From Standard & Poor's Credit Wire