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S&P said it will consider a downgrade of Japan’s sovereign debt. The nation faces the same pressure that countries from Ireland to Greece face. Japan’s national debt obligations are growing while its economy is not.

“The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected,” S&P said. Japan could have it debt cut to AA.

The trouble with a downgrade is obviously that Japan’s borrowing costs could go up, and along with that, it future debt service. That would put additional strain on its deficit, completing a vicious circle.

S&P and Moody’s have made more than passing comments about the sovereign debt of the US and UK. Both economies are viewed as being stronger than Japan’s is now, but that could change soon particularly for the UK. British stimulus packages have cost the government money during a period when its economy is not recovering at the same rate as US GDP is. The UK faces entrenched unemployment problems and a large number of fixed costs for its “social safety net” that America does not have

Japan’s trouble is ultimately a cautionary tale for the US. The Administration wants to freeze domestic spending for three years, but that would only save $250 billion over the next decade, a ten year period when the total deficit is expected to rise over $7 trillion. The US may not have the social obligations that the UK does, but prolonged 10% unemployment is likely to keep IRS receipts below projection.

The American argument to S&P to keep its current credit rating gets weaker by the day.

Douglas A. McIntyre