Moody’s Cut Japan’s Rating by One Notch to Aa3
Wednesday, August 24, 2021 10:25 AM

Moody’s Investors Service on Wednesday downgraded Japan's sovereign debt rating on concern that weaker public finances will reduce the government’s ability to support lenders in times of crisis. Moody's assigned Japan a stable outlook and said there was little chance of a crisis in Japan's debt market any time soon.

Moody’s lowered Japan’s rating to Aa3 from Aa2, citing large deficits and the buildup in government debt since the global recession in 2009.

Moody’s also downgraded the Japanese banks it rates by an average of one notch.

Bank units of Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. were among lenders that had their ratings lowered one step by Moody’s after it cut the government’s grade earlier today.

The downgrades “primarily reflect the combined impact of the change in the rating of the government of Japan as a supporting entity, and Moody’s reduced assumptions for government support to the banking system in a stress scenario,” the U.S. ratings company said in a statement today.

"We think that when you consider the credit strengths of Japan, we do not see a funding crisis arising in the next 12 to 18 months," Moody's Senior Vice President Thomas Byrne told Dow Jones Newswires.

Moody’s noted that Japan’s debt situation looked bad when measured against international standards. The International Monetary Fund’s projections for 2011 put Japan’s debt-to-GDP ratio at 233 percent, while home-grown estimates put out by the Cabinet Office put the level at 181 percent.

Finance Minister Yoshihiko Noda declined to comment on Moody's move, but defended the creditworthiness of Japan's debt. "The smooth sales of Japanese government bonds at recent auctions show that confidence remains unshaken," Noda told reporters after the downgrade. Local media quoted Prime Minister Naoto Kan as calling the action "regrettable." The bond market was unruffled. The yield on the 10-year JGB ended unchanged at 1.010 percent.

In a coincidental development, Japanese Prime Minister Naoto Kan told his cabinet on Tuesday he plans to step down once lawmakers pass two key pieces of legislation, adding that he expected a new leader to be chosen on Aug. 30.

The downgrade sent Japanese banking shares lower in Tokyo stock exchange trading on Wednesday, even though analysts said there was little significance to the downgrade owing to the stable outlook on the sector by Standard & Poor’s.