S&P Hints JPY Downgrade “Closer”

Saying that Japan has not done enough to reduce its public debt, Takahira Ogawa, Director of Sovereign Ratings at Standard & Poors, said in an interview today that the outlook for Japan was moving “closer to a downgrade”.

“Japan’s finances are getting worse every day, every second,” noted Ogawa also explaining that while Japan’s debt situation is worsening at a slow pace, the next downgrade while likely imminent, may not be immediate.

This past August, Moody’s Investors Services cut Japan’s credit rating by one notch to Aa3 while both Fitch Ratings and S&P lowered Japan’s rating to AA- with a negative outlook. Despite this downgrade, Japan has continued to find support for its bonds even as yields have soared in Europe.

This support has also been maintained despite Japan having one of the world’s highest public debt-to-GDP ratios currently estimated to be just above 200 percent. Most observers expect Japan’s total debt to soar in the coming years as the country continues to invest in rebuilding its infrastructure following the earthquake and tsunami earlier this year.

In a recent Bank of Japan auction, 10-year yields rose 3 basis points to 1.04 percent compared to the benchmark U.S. 10-year treasury notes with yields of 1.88 percent. Obviously, investors still have a great deal of faith in Japan’s ability to repay this debt despite the country’s massive debt.

The International Monetary Fund recently posted a statement on its website that Japan’s reliance on deficit financing places the economy at risk of a “sudden spike” in yields. Like several European countries, should yields rise significantly, the extra cost borrowing countries could face may be unsustainable over the long term.

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