Credit rating agency Moody's raised its rating on Japan's foreign currency debt on Wednesday, giving the yen a short-term boost, but other markets shrugged off the move as overdue recognition of the country's economic recovery. Moody's raised the rating, which applies to just $30 billion of government-backed foreign currency-denominated debt of public sector companies, by one notch to its top rating of Aaa from Aa1. It also raised Japan's issuer rating for foreign currency bonds, a move that analysts dismissed as being of little significance since Japan has zero foreign-denominated debt and is the world's largest creditor nation.
"It's just stating the obvious," said Takashi Yamanaka, an economist at UFJ Bank. "Confidence in Japan has been increasing, as shown in the recent rise in the Nikkei, and I think they were rather late in revising their rating." The ratings move comes after recent data showing Japanese business confidence at a seven-year high in March, and gross domestic product figures showing Japan's economy growing at its fastest clip in 13 years in the quarter ended December. Moody's said the upgrade reflected Japan's ballooning foreign currency reserves, but it said it was leaving Japan's more important A2 sovereign rating unchanged, given the nation's deteriorating government finances.
Some analysts were puzzled by this apparent contradiction. "Moody's move doesn't make sense. Japan's massive reserves are the result of issuing so much debt to fund intervention," said Kato Izuru, chief economist at Totan Research Co. "I wonder if Moody's still sees this as a healthy thing." Japan's foreign-denominated debt of around 25 trillion yen ($236.4 billion) as of December is dwarfed by its foreign reserves, which hit a record $826.577 billion at the end of March -- almost twice China's, which has the world's second largest coffers. Japan's foreign reserves have been swelling due to massive currency intervention -- around 35 trillion yen in the 15 months to the end of March -- to help halt a rise in the yen against the dollar and protect Japan's export-driven cyclical recovery.
SOVEREIGN NEXT?
In a knee-jerk reaction, the news sent the yen up to around 105.35 per dollar compared with the day's low of 106.16 yen. It later eased to around 105.50 yen. The bond market was unmoved by the news, and the stock market showed little reaction, with the benchmark Nikkei average <.N225> ending down 0.5 percent, just below a 32-month high. Moody's move comes around two weeks after rival rating agency Standard & Poor's raised its outlook on Japan's sovereign rating to stable from negative but said the AA-/A-1+ ratings themselves would probably remain unchanged for the next couple of years.
Analysts said the latest move did not necessarily signal a rise in Japan's sovereign rating by Moody's in the near term. "Moody's states that it is Japan's growing foreign reserves that prompted the upgrade, but that factor has nothing to do with yen-denominated debt," said Daisuke Uno, market analyst at Sumitomo Mitsui Banking Corp. "I think a rise in the JGB rating will not be for a while." Repeated fiscal pump-priming over the past decade pushed the country's public debt to around 655 trillion yen by the end of September, over six times the size of South Korea's economy. "Deflationary pressures persist, and the cyclical recovery is not yet strong enough to boost both nominal GDP growth and government revenue to the extent necessary to rein in the very large fiscal deficit," Moody's said in a statement. S&P downgraded Japan's sovereign rating in April 2002 and Moody's cut Japan's ratings two notches to A2 from Aa3 a month later, both citing concerns about ballooning debt, a weak economy and the slow pace of reforms.
The downgrades by Moody's, which put Japan's rating on a par with Poland and South Africa, and S&P enraged the Japanese government, which argued that Japan's status as the world's biggest creditor nation was not being recognised.///