Moody's Downgrades Japan To Aa3, Little Reaction

In a financial world where nothing seems to be worth what it was just two months ago. Moody’s downgraded Japan to Aa3 from Aa2. Japan was the world’s second largest economy by GDP until last year, when it was passed by China. The downgrade has caused little stir in the credit or stock markets. Either Moody’s reputation has suffered along with its rivals because of  the downgrade of U.S. debt by S&P, which many considered absurd, or investors have already “priced in” the after effects of the earthquake and the cost of a stimulus package to restart the Japanese economy.

In its note Moody’s said:

The rating downgrade is prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession. Several factors make it difficult for Japan to slow the growth of debt-to-GDP and thus drive this rating action.

Over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies. The March 11 earthquake and tsunami, and the subsequent disaster at the Fukushima Daiichi Nuclear Power Station, have delayed recovery from the 2009 global recession and aggravated deflationary conditions. Prospects for economic growth are weak, making it more difficult for the government to achieve deficit reduction targets and implement its Comprehensive Tax and Social Security Reform plan.

The Japan downgrade looks like the U.S.’s without the earthquake, if the response to the S&P action on America’s AAA rating is any indication. The rates paid by the American government for Treasuries have dropped since the S&P opinion was issued. The stock market has recovered much of the ground it lost after the credit agency made its announcement. The Japan market reaction was less than the one in U.S. The Nikkei dropped barely 1% on the trading day after the downgrade.

The credit rating agencies have developed a reputation for opinions issued well after the markets have come to the same conclusions, which makes them useless. The mortgage-backed securities scandal hurt their reputations as well, of course. Now, it seems that their troubles have hit another low. The opinions they issue seem to count barely at all.

Douglas A. McIntyre