Tokyo, Jan. 24 (Bloomberg) -- Japan needs to stem four years of falling prices to avoid having its fourth-ranking AA- grade lowered, said Takahira Ogawa, Standard & Poor's director of Asian sovereign ratings. ``The most important thing to do is get out of deflation,'' Ogawa said in an interview. ``If the degree of deflation further deteriorates, we might have to think about a potential downgrade.'' Consumer prices in the world's second-biggest economy have not risen since April 1998, eroding asset values and damping companies' earnings. Standard & Poor's in April cut Japan's foreign-currency and local-currency sovereign debt ratings one notch to AA- with a ``negative'' outlook, saying Prime Minister Junichiro Koizumi had not done enough to make banks write off more than 52.4 trillion yen ($444 billion) in bad loans or to reduce government debt, which ballooned to about 140 percent of gross domestic product.
The cut put the country's rating on a par with Malta and Taiwan. The rating is the fourth-highest according to S&P, and the lowest among the Group of Seven industrialized countries. Japan, the world's second-biggest economy, held the top AAA rating since 1975 until it was downgraded in February 2001. If deflation accelerates, ``that would harm the asset quality of the banking system and corporate balance sheets, and also impact the fiscal position of the government as well,'' Ogawa said.
Buy Funds
He suggested the Bank of Japan could further raise government bond purchases and buy index-based or real estate-based funds as policies to fight deflation. ``I don't know which is more effective than the other one. Every one of these are extraordinary policies compared to the conventional Bank of Japan policies, but they have to do it,'' he said. ``Right now, I don't know whether the government will come out with decisive action on deflation.'' The Bank of Japan on Wednesday kept interest rates near zero and left its monthly bond purchases at 1.2 trillion yen. The central bank cut interest rates close to zero in March 2001 and has tripled its monthly bond purchases during the past two years to pump more cash into the economy. //www.bloomberg.com