Moody's Lowers Japan's Rating; No Shock to Investors

(August 24, 2011) — Moody’s Investors Service has lowered the Government of Japan’s rating to Aa3 from Aa2, concluding the rating review that began on May 31.

According to the ratings agency, the downgrade was driven by large budget deficits and the build-up in Japanese government debt since the 2009 global recession.

While Standard and Poor’s decision to cut the US’ AAA ranking for the first time, Moody’s move to lower Japan’s sovereign rating was largely unsurprising and did not leave investors panicking. “Equity investors have suffered quite a few hits — the bursting of the tech bubble, the global financial crisis, issues in the Middle East with sharp jumps in energy prices, and now the growing catastrophe in Japan,” consultancy LCG Associates Vice President Britt Bentley told aiCIO in March as investors grappled with the impacts of Japan’s quake. “All these events have created volatility in the marketplace. Uncertainty in markets tends to not support market growth,” he said, acknowledging the fact that consultants have been generally skeptical about investing in the area for some time.

“Over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies,” a release by Moody’s stated. “The March 11 earthquake and tsunami, and the subsequent disaster at the Fukushima Daiichi Nuclear Power Station, have delayed recovery from the 2009 global recession and aggravated deflationary conditions. Prospects for economic growth are weak, making it more difficult for the government to achieve deficit reduction targets and implement its Comprehensive Tax and Social Security Reform plan.”

In May, Moody’s revealed warnings that it might downgrade Japan due to concerns over faltering growth prospects and a weak policy response to cutting its massive public debt, totaling 220% of GDP.