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The Honolulu Advertiser
Posted on: Saturday, June 1, 2002

Japan downgraded in Moody's ratings

By Hans Greimel
Associated Press

TOKYO — Saying Japan's public debt is soaring into "uncharted territory," Moody's Investors Service downgraded the country's credit rating yesterday for the second time in six months.

The new ranking puts Japan, the world's second-biggest economy and largest creditor nation, in the same league as Cyprus, Greece and Latvia. It's another blow to Japan as it struggles to pull out of its third recession in a decade.

The downgrade provoked a furious response from Japan. Haruhiko Kuroda, the Finance Ministry's vice minister for international affairs, called the downgrade "completely inappropriate" and demanded an explanation.

"We want them to reconsider, and we will be requesting that they do just that," he said.

The cuts follow similar downgrades last month by Standard & Poor's, which blamed a lack of progress in government reforms to tackle public debt.

Yesterday, Moody's slashed its rating for yen-denominated domestic securities issued or guaranteed by the Japanese government by two notches, to A2 from Aa3. Moody's last cut the rating in December.

Moody's said the cut reflected its conclusion that "the Japanese government's current and anticipated economic policies will be insufficient to prevent continued deterioration in Japan's domestic debt position."

Moody's also cut ratings on the Development Bank of Japan and the Japan Finance Corporation for Municipal Enterprises, both government-backed lending agencies.

Moody's said the level of government indebtedness "will approach levels unprecedented in the postwar era in the developed world, and that as such Japan will be entering 'uncharted territory."'

By the end of March, Japan's public debt stood around $5.4 trillion or about 135 percent of gross domestic product, higher than nearly any other industrialized country's.

Prime Minister Junichiro Koizumi has promised reforms to clean up massive bad debts at Japanese banks, rein in public spending and turn over money-losing public businesses to the private sector. He has also pledged to cap new government debt issues at $242 billion.

But many analysts say Japan's decade-long economic slump is far from improving, and warn that lawmakers are failing to grasp the magnitude of the crisis.

Though Koizumi has promised to cut government spending, his government has drawn up a two supplementary budgets — a move Standard & Poor's said puts "unsustainable" pressure on public finances.

The problems are only made worse by Japan's aging population, which will force the government to spend more on health and retirement, and by the thatch of bad loans hanging over private banks.

Moody's predicted that domestic debt will worsen over the next "few years" but that several features would prevent Japan from plunging into a medium-term crisis. Among them are Japan's high household savings rate and the government's small exposure to foreign creditors.