Fitch Downgrades Japan Credit Rating As Debt Grows

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Fitch cut Japan’s sovereign credit status on Tuesday, May 22 to the lowest level among global ratings agencies as a political stalemate dims the chance that the country can curb its snowballing debt, Reuters reported.

Fitch Ratings cut Japan’s long-term foreign currency rating by two levels from AA to A plus, the fifth highest investment grade. It cut the more important local currency rating by one notch from AA minus to A plus. Both were given a negative outlook.

Fitch warned further downgrades were possible unless the government takes new fiscal policy measures to stabilize public finances and its ratio of debt to gross domestic product.

The downgrade could serve as a chilling reminder to highly indebted countries in Europe that urgent action is needed to trim public debt and prevent concerns about sovereign debt from weighing further on the global economy.

Several euro zone countries have been hit with multiple downgrades as the region struggles to deal with its mounting debt crisis.

The United States is expected to reach a $16.4 trillion government debt ceiling after November presidential elections, laying the ground for another protracted political battle over how to cut the budget, similar to a bitter debate that rattled financial markets last year.

After Japan’s ratings cut, the dollar rose against the yen to a session high of 79.85 yen. But analysts said the downgrade is unlikely to have a lasting impact on markets because Japanese government bonds are mostly held by domestic investors.

Fitch’s A plus local currency rating for Japan is the one most closely followed by investors because the government’s debt is largely funded by domestic investors, who are backed by about $15 trillion in household savings.

Bank of Japan data shows that domestic investors held 93 percent of government debt as of December.

The Fitch rating is one notch below its rival ratings agencies. Moody’s Investors Service rates Japan Aa3 with a stable outlook. Standard & Poor’s rates Japan at AA minus with a negative outlook. All the ratings are broadly in the middle of the investment grade range of ratings.

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