Japan’s debt rating cut by Moody’s

Prime Minister Naoto Kan is expected to resign due to unpopular policies and a fall in popularity [Reuters]

Credit rating agency Moody’s Investors has downgraded Japan’s credit rating, citing the country’s weak growth prospects, massive government debt and constant political turmoil.

Moody’s cut Japan’s government bond rating to Aa3 from Aa2, though Moody’s said Japan’s future outlook was stable.

Japan, the world’s third largest economy, has the highest public debt level amongst developed countries, already twice the size of its $5 trillion economy.

“The rating downgrade is prompted by the large budget deficits and the build up in Japanese government debt since the 2009 global recession,” Moody’s said in its statement.

“The March earthquake also undermined Japan’s recovery from the 2009 global recession,” it added.

Major Japanese banks, includuing Bank of Tokyo-Mitsubishi and Sumitomo Mitsui were also downgraded.

In May, Moody’s warned it could downgrade Japan after the economy slipped back into recession in the first quarter due to tumbling output and exports following the March earthquake and tsunami.

According to the latest government figures, Japan’s economy shrank by an annualised rate of 1.3 per cent in the three months to the end of June, shrinking 0.3 per cent from the previous quarter.

At the same time, Moody’s warned that power problems may cap the ability of the economy to rebound quickly.

Japan’s electricity production has been affected by the crisis at the Fukushima Daiichi nuclear power plant, which was damaged in the March disaster.

The fear is continuing uncertainty about the supply of power could limit investment by both the public and private sectors.

“These developments further hamper the economy’s ability to achieve a growth rate strong enough to steadily reduce the budget deficit,” Moody’s said.

The rating cut comes ahead of another leadership shuffle in Japan.

With his popularity sinking, Naoto Kan is preparing to resign as prime minister on Friday. That would set the stage for a leadership election within the ruling party and a new prime minister, who will be Japan’s sixth in four years.

Kan has been criticised for lacking leadership after the earthquake and subsequent nuclear crisis, and survivors of the disasters complain of slow relief and recovery efforts. Polls show his approval rating is below 20 per cent.

Kan described the downgrading as “regrettable”, according to Jiji Press news agency, while Yoshihiko Noda, Japan’s finance minister, defended the credit value of Japanese bonds.

Noda, a fiscal conservative who has joined the race to succeed Kan, said he wanted to refrain from direct comment on Moody’s downgrade.

Whoever becomes Japan’s next leader has a mountain of challenges ahead, from battling a soaring yen and forging a post-nuclear crisis energy policy to rebuilding from the tsunami and reining in public debt while paying for reconstruction and the bulging costs of an ageing society.