Moody’s cuts outlook for Japan’s sovereign debt rating

oody’s Investors Service Inc. on Tuesday lowered the outlook on Japan’s massive debt to “negative,” voicing a doubt the political leadership’s ability to to tackle the issue and suggesting a possible downgrading in the future.

“The rating action was prompted by heightened concern that economic and fiscal policies may not prove strong enough to achieve the government’s deficit reduction target and contain the inexorable rise in debt, which already is well above levels in other advanced economies,” Moody’s said in a statement.

The US rating agency cut the outlook on Japan’s Aa2 bond rating to “negative” from “stable.

Moody’s has given a rating of Aa2, the third highest on a scale of 19, for Japan’s sovereign debt.

“Japan’s very large economy and very deep financial markets provide the wherewithal to absorb economic shocks. Nevertheless, the inexorable rise in government debt suggests that actions are urgently needed to regain a path of fiscal consolidation,” Moody’s said.

Prime Minister Naoto Kan, who faces political gridlock, is pushing to reform the country’s tax and social security systems to tackle nation’s debt crisis.

However, Kan struggles to implement a JPY 92.4 trillion (USD 1.1 trillion) budget for fiscal 2011 starting April as opposition parties, which control the Upper House, are refusing to vote for the budget or cooperate with Kan on wider reforms.

“There is increasing uncertainty over the ability of the ruling and opposition parties to fashion an effective policy reform response to the debt and growth challenges,” Moody’s said.

But Moody’s said while a bond funding crisis is “unlikely in the near to medium term, pressures could build up over the longer term, given Japan’s massive pool of savings and the fact that nearly all of Japan’s debt is held domestically.

“The government can fund itself at a lower nominal cost than any other advanced economy,” said Moody’s.

The outlook horizon would “extend over the next year or two “depending on developments.” It was the first negative action against Japan since May 2002, according to Moody’s.

The change of Moody’s outlook came after another US credit rating agency Standard and Poor’s lowered Japan’s sovereign debt rating for the first time in almost nine years late January, to AA-minus from AA, citing the lack of a coherent government strategy to deal with the country’s fiscal deficits.

The Japanese government estimates Japan’s public debt has been approaching 200 percent of annual gross domestic product, the worst debt among all major industrialized countries.

The nation’s deficit in the current fiscal year is estimated to total JPY 30.8 trillion (USD 371 billion), according to Cabinet Office.

Japanese Finance Minister Yoshihiko Noda declined to comment on the downgrade. “I won’t comment on each action by private credit rating agencies, he told reporters.