S&P cuts Japan sovereign rating outlook on quake costs

Standard and Poor's threatened to cut Japan's sovereign credit rating again, warning the huge cost of last month's devastating earthquake will hurt already weak public finances unless bickering politicians can agree to raise taxes. It affirmed its long-term sovereign credit rating on Japan at AA minus - the lowest among the major agencies - but downgraded the outlook to negative from stable.
The change comes three months after S&P had cut Japan's sovereign credit rating - the first reduction since 2002 - saying the government had no plan to deal with its mounting debt while adding the administration's loss of an upper house majority had compounded the problem.
Public debt, already twice the size of the $5 trillion economy, is set to swell as the country faces reconstruction costs following the March 11 earthquake and tsunami that could reach 50 trillion yen ($613 billion), S&P said. "If there are no revenue enhancing measures such as tax increases, we expect the central and local governments to bear most of this cost," the agency said.
However, the country's deepest crisis since World War Two has not healed rifts between the government and the opposition, whose majority in the upper house stands in the way of fiscal reform. In addition, Prime Minister Naoto Kan's deep unpopularity means that even within his party, he has little room for manoeuvre to shore up the country's public finances.
"This will put more pressure on the Japanese government to do something about revenue enhancement," Takuji Okubo, chief economist at Societe Generale, said. Still, Okubo said the S&P action could help the government's case for fiscal reform, which centres on raising the 5 percent consumption tax - something acknowledged by Japan's finance minister.
"Fiscal reform is something we cannot avoid," the minister, Yoshihiko Noda, said. "The government at present is doing its utmost for disaster relief and reconstruction. It is important to pursue fiscal reform at the same time. We will try to gain trust in Japan's economy and public finances in and outside Japan."
Japanese sovereign credit default swaps were 1 basis point wider at 77 basis points after the S&P announcement, but they remain well off post-quake peaks near 120 basis points and a few basis points tighter than just before the disaster. The yen dipped shortly after the announcement with the dollar climbing to an intraday high of 81.781 yen, but analysts said the S&P move was unlikely to have much impact. "The impact on the forex market is likely to be temporary," said Masafumi Yamamoto, chief currency strategist at Barclays Capital in Tokyo.