The Japanese economy is the third largest in the world behind the USA and China and the nation’s GDP is roughly worth $5 trillion. The obvious elephant is the Japan has the largest debt to GDP ratio of any developed nation at 226% meaning that the nation’s public debt burden is over $11 trillion. Japan has a falling birth rate, meaning that the population is aging and social security costs will mount as more people need health care provision in older age; these needs must be met by a dwindling active workforce.
Japan has been regarded as a safe haven and vast sums of money were deposited in Yen accounts as the worst of the Global Financial Crisis raged – this pushed the Yen up against the US Dollar peaking at about 75.8 to the Dollar (October 2011). Currently, the Dollar is trading near a seven-year high against the Yen at about 118.9. It would be interesting to know how much of the safe haven investment remains in Yen.
Shinzo Abe is trying to restore a modest level of inflation in the Japanese economy to excise the negative economic effects of 20 odd years of deflation. His government also enacted the first of two increases in sales tax which were planned by the previous administration. Predictably, the increase has proved unpopular with consumers and blamed for returning the economy to recession in Q3. Whilst the Japanese stock market is going from strength to strength, little added prosperity has flowed back to the average citizen which explains why consumer demand has been sluggish in light of the tax increase.
Mr Abe has called a snap election which he is expected to win. Should he do so, it is expected that he will defer the second increase in sales tax, probably for 18 months at least.
In response to these factors, Moody’s has dropped Japan’s credit rating by one notch from Aa3 to A1. The move brings Moody’s rating in line with Fitch and both are a notch lower than the other major ratings agency Standard and Poor’s. Whilst the rating remains firmly in investment grade status, it is now four notches below the German and US rating. Theoretically, it could mean that Japan’s borrowing costs will rise.