Moody Moody's Attacks Japan

June 4, 2011

Japan's return to recession and a bigger-than-expected slump in first-quarter economic growth are negative for its credit rating, Moody's Investors Service said, warning that a delay in recovery could warrant additional fiscal and monetary stimulus.

 

The triple blow of the March earthquake, tsunami and nuclear crisis has nudged Japan into recession and led to a surprisingly deep 0.9 percent contraction in January-March, which Moody's said was negative for Japan's rating and made it increasingly urgent for Prime Minister Naoto Kan to compile a second extra budget.

 

"Reconstruction and relief expenditures will eventually lead to a rebound in economic growth later this year and in 2012," Moody's said in a statement on Monday.

 

"But the scale of the loss in output and income caused by the earthquake may already have lowered the future growth trajectory of the Japanese economy, thwarting Japan's long-term growth rate, which is currently around 1 percent," it said.

 

While the shock from power shortages will be temporary, the risk of Japanese companies permanently losing global market share due to current supply chain disruptions is more damaging, Moody's said.

 

"Should the rebound in Japan's economy be weaker than forecast or delayed entirely, additional actions by both the Ministry of Finance and Bank of Japan may be needed," the ratings agency said in a statement.

 

Japan is facing its worst crisis since World War Two after the magnitude 9.0 earthquake and a deadly tsunami battered its northeast coast on March 11, leaving about 25,000 dead or missing and crippling a nuclear power plant.

 

The economy shrank in January-March at nearly double the pace forecast by markets and is expected to contract again in the second quarter as supply chain disruptions and power shortages hit factory output.

 

ADDITIONAL ACTION

The Bank of Japan eased monetary policy days after the quake but has stood pat since then on the view -- shared by many economists -- that growth will pick up from around autumn when supply constraints ease.

 

But the central bank has expressed its readiness to ease policy further if the damage from the quake is bigger than expected and threatens Japan's return to a moderate recovery.

 

The government, for its part, passed through parliament a 4 trillion yen ($48 billion) first emergency budget for immediate disaster relief and is now eyeing a second extra budget for reconstruction, which Moody's said will "likely need to be much larger than the first one."

Kan has signaled that the second extra budget would be quite big, while Economics Minister Kaoru Yosano said reconstruction may cost up to 15 trillion yen.

 

But any progress in compiling the second extra budget would be slow as Kan needs cooperation from opposition parties, which control the upper house, to pass necessary legislation through parliament.

 

Another uncertainty overshadowing Japan's fiscal outlook is the extent to which the government will share the burden of Tokyo Electric Power's <9501.T> rising quake-related liabilities, Moody's said.

 

Japan's public debt, at double the size of its $5 trillion economy, is the biggest among major industrialized economies, limiting room for additional fiscal stimulus and triggering warnings from ratings agencies.

 

But lawmakers are hesitant about raising taxes, particularly the politically sensitive sales tax, for fear of scaring voters away, even as the cost of quake reconstruction adds to the heavy burden of spending for social welfare in a rapidly aging society.

 

Moody's warned in February that it might cut Japan's Aa2 rating -- its third highest rating -- if the government fell short of crafting comprehensive tax reform to fix the country's tattered finances.

($1 = 81.710 Japanese Yen)

 

* Article by Leika Kihara, Monday, May 23, 2011
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My response:

 

Mrs. Kihara seems to be worried quite a bit about the situation in Japan, and seems to have a very pessimistic view of Japan's future - above all, the mood of the article gives a sense of fear of "Moody's" reaction to everything that has happened in Japan over the past year.

 

If we really need to pass judgement on Japan, shouldn't we first look at what's happening here in the USA? We didn't have a Tsunami, we didn't have an earthquake, we didn't have a nuclear disaster - and yet, we've got much bigger problems than Japan: we have a neve-ending Credit Crisis, with a banking system more afraid of the end of the month than the end of the world, the real estate market is totally devastated, there are still 17 million American citizens out of work and with no hope of finding a job anytime soon...

 

Should we be afraid of Moody's, too, or do we still have enough "Friends of the Family" in New York and in Washington to make sure Moody's will not put us all in a worse "mood" with a bad credit rating?

 

Food for thought.


Gilles A. Herard, Jr.

 

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