Japan’s trade switcheroo

Posted by Kate Mackenzie on Jan 24 10:37.

The WSJ has a gloomy piece about Japan’s economy, which is expected to report its first annual trade deficit since 1980 on Wednesday, (as well as missing its target date for balancing its budget).

The startling change is partly a result of one-time factors like the disastrous earthquake and tsunami last March, which destroyed factories, crippled supply chains and idled many of the country’s nuclear reactors. But the quake seems to have accelerated trends—like a decline in corporate competitiveness—that have been bubbling under the surface for years as the export superpower slowly transforms into a nation of pensioners.

It goes on to chronicle the loss of export-oriented manufacturing industries, together with the ageing population, as well as increases in the prices of commodities due to competition from emerging nations, and rising energy costs as much of the country’s nuclear power remains offline.

But analysts at SocGen say a trade deficit is not such a problem, however, because Japan’s current account balance is being kept in surplus by its net capital inflows. As a note to clients this week observed:

The overall picture of Japan’s income balance is reassuring, however. At JPY 68 trillion at the end of 2010, Japan’s FDI assets abroad were four times as much as that of foreigners’ FDI in Japan at JPY 18 trillion. Even if foreigners’ FDI keeps growing at 1.5 times faster than that of Japan’s FDI abroad, it would take more than 30 years to change their position.

Moreover, Japan’s security assets abroad at JPY 272 trillion at the end of 2010 were 1.8 times as much as that of foreigners’ security assets in Japan at JPY 152 trillion. Reassuringly, the former has consistently produced much higher yields than the latter. The day may come when Japanese financial assets start to produce higher yields than that of foreign financial assets, but this is unlikely to take place in the next decade.

Ageing Japan faces 'chronic' trade deficit after Fukushima

Japan has racked up its first trade deficit in 31 years as the country's ageing crisis hits home and the Fukushima nuclear disaster raises dependence on imported fuel.

By Ambrose Evans-Pritchard, International Business Editor

7:06PM GMT 24 Jan 2012

The darkening picture has set off deep soul-searching about the sustainability of the nation's Japan's economic model, and ultimately the trajectory of its 1,010 trillion yen (£8.3 trillion) public debt.

Official data to be released overnight is expected to show the country ran a deficit of about $24bn (£15.4bn) in 2011, and has been running a structural shortfall of $3bn a month since the tsunami shut down most of Japan's nuclear industry.

It is a poignant moment for a once unbeatable powerhouse that built its economic miracle on exports of cars, computers, cameras and machine tools, and once seem poised to challenge America for dominance of global trade.

The psychological blow is doubly strong as China pulls ahead with 8pc annual growth, vaulting past Japan last year to become the world's second biggest economy.

Japn has switched to imports of liquefied natural gas and other fossil fuels, with a fourfold rise in oil demand this year by its utilities. This has had major knock-on effects on the country's trade structure, a shift that is likely to endure.

Takuji Okoba from Societe Generale said the trade deficit would be a "chronic feature" of Japan's economy in coming years, even if investment income from the country's $2.4 trillion stash of nets assets abroad is enough to stop the broader current account from also going into the red.

Japan relied on nuclear power for 29pc of its electricity before the Fukushima catastrophe, and had plans to boost this to 50pc by 2030. This will have replaced by imports for the foreseeable future since premier Yoshihiko Noda said the damaged nuclear plants will never be reopened. Other nuclear sites will be phased out.

The disaster has brought forward the erosion of Japan's trade surpluses that would have happened anyway as the country's demographic crunch turns serious. The population has been declining since 2005, and will fall from 127m to 90m by mid-century according to Japan's Social Security Research Institute.

The median age is already the world's highest at 44.5 years and is rising relentlessly, with growing numbers of elderly people drawing down life savings. The household savings rate has dropped to 2pc from 16pc at the end of Nikkei boom 20 years ago. The country's largest pension fund has become a net seller of Japanese bonds to meet payout demands.

Japan has relied on its trade surplus as a safety buffer, helping to preserve calm even as public debt balloons to reach 238pc of GDP this year – according to the International Monetary Fund – or over 260pc including the bonds of the Fiscal Investment and Loan Programme.

The concern is that confidence in Japan's debt trajectory could evaporate fast. Tokyo's R&I rating agency stripped Japan of its AAA rating in December, warning that Europe's crisis has brought sovereign debt risk into sharper focus. Japan has lagged the rest of the G7 in mapping a path back to fiscal rectitude. Its budget deficit will be 7.6pc of GDP this year, with tax revenues covering just half government spending.

Mr Noda acknowledged the danger in a speech on Tuesday. "The damage is irreversible once a nation's credibility is lost. This is clearly apparent in the current situation in Europe. There's no time to put this off any longer: as things stand right now, the burden will be too heavy for future generations," he said.

Mr Noda plans to press ahead with controversial proposals to raise the sales tax from 5pc to 10pc over the next three years, despite the risk this will weaken an economy already struggling with an over-strong yen that is "hollowing out" Japan's industrial base. A JP Morgan study found that Japanese auto producers will manufacture just 25pc of their cars in Japan itself by 2014, down from 33pc in 2011. The economy as a whole contracted 0.4pc last year. Output is still far below its pre-Lehman peak.

Tokyo has urged the Bank of Japan to step up monetary stimulus to stave off deflation and cushion the blow from fiscal tightening, but Governor Masaaki Shirakawa said on Tuesday the bank had no plans to step up bond purchases to inject liquidity. "We need to fully watch the possibility of the yen's rise having a negative impact on the Japanese economy," he said.

Japan's NEC to slash 10,000 jobs

ReutersBy Tim Kelly and Reiji Murai | Reuters

TOKYO (Reuters) - NEC Corp said Thursday it will slash 10,000 jobs, almost one in 10 of its workers, in a bid to cut costs as competition from foreign rivals including Apple Inc pushes it deep into the red.

NEC blamed its poor performance on weak demand for its smartphones amid the popularity of Apple's iPhone in Japan, as well as on inroads by foreign rivals into the domestic IT infrastructure business and difficulty in expanding overseas.

It warned it would post a net loss of 100 billion yen ($1.3 billion) for the year to March 31, much bigger than its previous forecast of a 15 billion yen profit and a similar average estimate from eight analysts polled by Thomson Reuters I/B/E/S.

For the three months ended December 31 it booked a net loss of 87 billion yen.

It also slashed its projection for annual mobile phone sales by nearly a quarter to 5 million phones and most of the job cuts will be in its mobile phone business.

Headcount will be reduced by the end of September and around 7,000 layoffs will be in Japan, Nobuhiro Endo said at a news conference in Tokyo.

Endo said NEC will miss a target to raise overall sales to 4 trillion yen next business year but would still try to reach a goal of boosting its operating profit margin to 5 percent.

The restructuring would result in a charge of 40 billion yen this financial year but would add 40 billion yen to income in the next financial year, Endo added.

Shares of NEC finished unchanged from Wednesday's close at 168 yen. In the past 52 weeks, its shares have plummeted 32 percent. The company announced its results and restructuring plan after the market closed.

($1 = 78.2250 Japanese yen)

(Additional reporting by Nobuhiro Kubo; Editing by Edwina Gibbs)

Nikkei average falls for third session

irishtimes.com - Last Updated: Monday, January 30, 2012, 07:55

Japan's Nikkei average declined for a third straight session today, hit by a slide in Mitsubishi Electric shares after the government suspended dealings with the firm.

But investors remained hopeful that Greece and its private creditors would be able to clinch a long-awaited debt swap deal this week and avoid a chaotic default.

Mitsubishi Electric Corp shed 14.8 per cent and topped the main board as the heaviest traded share by turnover after Japan's Defence Ministry suspended dealings with the heavy electric machinery maker, saying it had overcharged for its services.

The stock was approaching "oversold" territory, with its 14-day relative strength index at 33.

"Earnings results for major exporters and high-tech firms were obviously hit by Thai floods and their forecast cuts were inevitable and expected, but Mitsubishi Electric's drop was an extra drag on the market today," said Fujio Ando, senior managing director at Chibagin Asset Management.

The benchmark Nikkei fell 0.5 per cent to 8,793.05 in its third straight session of losses after hitting a three-month high last week. Some market participants said last week's rally was spurred by month-end window dressing by domestic institutional investors.

The benchmark is up 4 per cent this month, heading for its best January performance since 1999.

The broader Topix slipped 0.5 per cent to 757.01, while reports over the weekend pointed to a debt swap deal between Greece and its private creditors this week, a crucial precursor for sealing a new bailout for the debt-ridden country.

Trading volume slipped, with 1.65 billion shares changing hands on the main board, down from 1.94 billion shares on Friday.

Despite slide in Mitsubishi Electric shares, Mr Ando said the government's move would have a limited impact on the company. "The suspension may last for six months and they might get a fine but keep in mind that the company is a 3 trillion yen (€29.7 billion) annum company so the impact is limited," he said.

Bucking the trend was Advantest, a major manufacturer of chip testers, which jumped 12.4 pct after forecasting a small annual profit of 1 billion yen, which some analysts called a significant surprise.

Japan's non-life insurers also outperformed, with NKSJ Holdings surging 7.4 per cent as analysts said they did not expect further hefty losses from Thai floods. The company raised its estimated net losses for the year ending March to 100 billion yen from a previous estimate of 12 billion yen.

Peers Tokio Marine Holdings Inc advanced 2.6 per cent and T&D Holdings Inc rose 1.8 per cent.

Japan's earnings season has picked up steam with megabank Sumiomo Mitsui Financial Group and major exporter Canon reporting after the close, and Toshiba and Honda posting results tomorrow.

But Nippon Electric Glass dropped 10 per cent to a two-month low after it reported a 53 per cent year-on-year drop in net profit for the nine months ended December.

In response, Nomura lowered its full-year earnings forecast by 23 per cent and its target price by 15.5 per cent to 710 yen.

Corporate results have so far disappointed investors, with 61 per cent of the 18 Nikkei companies that reported quarterly figures failed to meet market expectations, data from Thomson Reuters StarMine showed. That compared with 36 per cent for S&P 500 companies.

Yen strength and the Thai floods are affecting companies across the board resulting in delays in orders for goods and services.

"We are seeing a slowdown. It's not as if it's a complete meltdown," said a sales trader at a foreign brokerage said. "You just have to expect earnings wouldn't be so great this quarter. The market will start to look through it."

Reuters

Japan population 'to fall by 30%'

irishtimes.com - Last Updated: Monday, January 30, 2012, 10:41

Japan's population is expected to decline by 30 per cent to below 90 million people by 2060, with two out of every five people aged 65 or older, a government agency said, underlining the financial burden on one of the world's fastest-ageing societies.

Prime minister Yoshihiko Noda has vowed to double the 5 per cent sales tax in two stages by October 2015 to help fund bulging social security costs, which are rising by 1 trillion yen ($13 billion) every year and aggravating a public debt already twice the size of Japan's $5 trillion economy.

But the biggest opposition party, although agreeing about the need for a tax hike, is threatening to block legislation in parliament's upper house. The opposition argues that the ruling Democrats' plan to revamp public pensions would require a higher levy than currently planned.

"The trend of the ageing society will continue and it is hard to expect the birth rate to rise significantly," chief cabinet secretary Osamu Fujimura told a news conference. "Thus, comprehensive tax and social security reform is needed."

Japan's population is ageing at the fastest pace among developed countries due to a low birthrate and long life expectancy.The population is expected to fall below 100 million in 2048 and dip further to 86.74 million by 2060, from 128.06 million seen in 2010, according to a projection by a research arm of the health ministry released today.

By 2060, the number of people aged 14 or younger is forecast to fall by more than half, to 7.91 million. By contrast, the population of those aged 65 or older is seen rising 18 per cent to 34.64 million, accounting for 39.9 per cent of the entire population, compared with 23 per cent estimated in 2010.

The fertility rate, the expected number of children born per couple, is expected to reach 1.35 in 2060 from 1.39 seen in 2010, below 2.08 needed to keep the population from shrinking and compared with the global rate of around 2.5.

The estimate also showed that the average life expectancy will rise by over four years in 2060, to 84.19 for men and 90.93 for women.The population projection is compiled roughly every five years based on data including a census and demographic statistics and serves as reference materials for government's social security policy.

Reuters

Corea vs Japón: el huracán Samsung tumba los resultados de Sony, Sharp y Panasonic

Cambio de poder en el mundo tecnológico. Japón, el tradicional dominador de la electrónica de consumo, ha visto como sus principales multinacionales del sector han entrado en pérdidas en 2011 fruto del imparable crecimiento de sus rivales coreanas. Samsung, el mayor fabricante del mundo de teléfonos móviles tras superar a Nokia, logró unos resultados récord que contrastan con los números rojos de los nipones Sony, Sharp o Panasonic.

La batalla desatada en el segmento de teléfonos, tablets y televisiones inteligentes se está saldando con una amplia victoria para los coreanos. Samsung logró unos beneficios de 12.200 millones de dólares en 2011, un 15% menos que en 2010, pero elevó sus ventas anuales un 7%, hasta 146.000 millones. Además, el fabricante de la gama Galaxy aceleró sus inversiones hasta superar los 20.000 millones de dólares.

Pérdidas históricas

Junto a Samsung, su archirrival Apple se convirtió en el principal dominador del mercado en EEUU y Europa, donde sigue arañando cuota de mercado a fabricantes como la finlandesa Nokia, que perdió 1.200 millones en 2011, o RIM, que también pudo entrar en números rojos al cierre del año, según los analistas. De la mano de Android, el sistema operativo de Google, la firma coreana ha alcanzado el éxito, especialmente, en el emergente sector de televisiones inteligentes (smartTVs), donde compite con la también coreana LG, que en 2011 perdió 384 millones de dólares.

La escalada del yen en los mercados de divisas frente a dólar o euro volvió a restar competitividad a los Sharp o Panasonic, que firmaron pérdidas históricas en 2011. En conjunto, estas dos empresas perdieron la friolera de 14.000 millones de dólares en conjunto durante el año pasado, afectadas por su caída en el mercado de televisores y la falta de un producto competitivo en los móviles. La debilidad del won, la moneda surcoreana, impulsó a los fabricantes que operan desde Corea. Por su parte, Sony perdió 2.900 millones en año fiscal.

Japan Current Account Surplus Falls At Record Rate



-- Japan posts current account surplus for December and full-year 2011

-- The deficit in the merchandise trade component was the first since 1963

-- The overall surplus was due to strong income flow from overseas assets

-- The figures show the trade pattern shifting from direct exports to profits coming from overseas production

TOKYO -- Japan's current account surplus shrank by its fastest rate on record in 2011, as exports stumbled and energy prices soared, leading to the first shortfall in merchandise trade in decades, government data showed Wednesday.

The result was partly due to extraordinary events such as the March earthquake and tsunami in Japan, but economists warn that the yen's persistent strength and a growing reliance on expensive energy imports mean the picture won't improve anytime soon.

The surplus in the current account--the broadest measure of how much Japan earns from international trade and investment--narrowed 43.9% from the previous year to Y9.629 trillion in 2011, the first drop in two years, finance ministry data showed.

It was the smallest surplus since a Y7.153 trillion surplus in 1996, the ministry said, and the sharpest contraction since at least 1986, when comparable percentage-change figures first became available.

The merchandise trade component of the data showed a deficit of Y1.609 trillion, the first trade deficit in the current account figures since 1963.

"Japan's trade deficit is likely to expand given ongoing shifts in its industrial structures," said Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute. Such moves include a shift of factories overseas to reduce exchange-rate risks, and increased purchases of imported energy to make up for shutdowns of domestic nuclear reactors since the March earthquake. " There's a very high possibility that Japan's current account surplus will keep shrinking," Nagahama said.

Separate data from the finance ministry Wednesday appeared to support that view: Japan showed a Y1.560 trillion merchandise trade deficit for the first 20 days of January, about twice the size of the deficit in the same period a year earlier. The figure was also the largest for the first 20 days of any month since 1990 when comparable figures were first made available, the ministry said.

Exports of plastic, steel and semiconductors fell in January, while imports of gas and coal climbed, it said.

"Today's data indicate that January's current account balance could be in deficit" for the first time since January 2009, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse.

Lower current-account surpluses should cause the yen to weaken to the benefit of exporters, Nagahama said, but the overall impact on Japan's growth would be negative. Each one-percentage point shrinkage in the current-account surplus relative to gross domestic product could shave Y5 trillion off annual GDP, partly by pushing up long-term interest rates, he said. A weaker yen would also boost the value of imports.

The current account tracks the difference between what a country saves and what it invests. A declining surplus means lower savings, which could put upward pressure on domestic borrowing costs.

Pessimists say Japan's current account balance could fall into sustained deficit as early as 2015, as retirees spend their savings and a trade deficit becomes entrenched. Optimists say that wouldn't happen until the late 2020s, as Japan still has a huge income surplus and its shrinking population should keep domestic demand weak and promote saving.

Last year, Japan posted a Y14.03 trillion income surplus, up 19.9% from the year before, thanks to huge holdings of assets abroad, the data showed.

-By Takashi Nakamichi and Kelly Olsen, Dow Jones Newswires; 813-6895-7558; takashi.nakamichi@dowjones.com

(END) Dow Jones Newswires
02-07-121935ET
Copyright (c) 2012 Dow Jones & Company, Inc.

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S&P cuts Sony debt rating

irishtimes.com - Last Updated: Wednesday, February 8, 2012, 08 :45

Standard and Poor's cut its long-term debt rating on Sony today to BBB+, warning it may drop the consumer electronics giant a further notch within a year unless it shows it can achieve a significant turnaround in profitability.

The rating action will put more pressure on incoming chief executive Kazuo Hirai to move quickly to stem losses, particularly in a floundering television unit on course for an eighth straight year of losses amid slumping demand and savage competition from foreign rivals led by Samsung Electronics.

A lower rating mean the company has to pay investors more to borrow or refinance loans.

"We could lower the ratings further if we see no meaningful sign of a recovery in earnings within the next six to 12 months," S&P said in a statement.

"The major reason for the extended losses is Sony's strategy to aggressively expand its global market share despite strong competition, a massive erosion of prices and its high cost structure compared with overseas competitors," S&P said.

Sony warned in an earnings announcement last week that it was heading for a bigger-than-expected $2.9 billion loss in the year ending on March 31st.

A day earlier Sony had named Mr Hirai (51) to succeed Howard Stringer at its helm. Mr Hirai, a 28-year veteran of Sony who is best known for returning the PlayStation gaming unit to profit, takes over on April 1.

S&P estimates that Sony's ratio of total debt to capital will reach 40 per cent by the end of March compared with 35 per cent a year earlier. Sony was also downgraded by ratings agency Moody's last month, being cut to Baa1 from A3.

Moody's also downgraded Japanese rival Panasonic, citing concerns about continuing losses at its TV unit.

Reuters

Was the K Super Worth the Price Tag for Japan?

02.13.2012

At number one on the TOP500, the Fujitsu K supercomputer is truly an awesome engineering achievement. Faster than the next eight machines on the list combined, the Sparc-powered K remains top dog.

Now legislators in Japan are questioning whether the $1.12 Billion investment in K was really worth it for a country in the midst of severe austerity in the wake of recent natural disasters. The Japan Times reports that the reaction has been to make the supercomputer much more accessible.

The science and technology ministry’s Hayashi expressed hope that the networked system will help increase the number of supercomputer users in Japan from the current 1,000 to 20,000. If it doesn’t, though, the K computer — which, on top of the ¥112 billion already poured into its development, also costs ¥10 billion a year to operate and maintain — would end up being an embarrassing national white elephant of financially petaflopic proportions.

“Petaflopic proportions?” That’s a new one! Read the Full Story.

Seven arrested over Olympus scandal

irishtimes.com - Last Updated: Thursday, February 16, 2012, 09:31

Four months after one of Japan's biggest corporate scandals, police and prosecutors today arrested seven men over their role in a $1.7 billion (€1.3 billion) accounting fraud at Olympus.

Tokyo prosecutors arrested ex-president Tsuyoshi Kikukawa, former executive vice president Hisashi Mori and former auditor Hideo Yamada on suspicion of violating the financial instruments and exchange law, officials said.

Also arrested were former bankers Akio Nakagawa and Nobumasa Yokoo and two others suspected of helping hide huge investment losses through complex M&A deals.

The three former executives had been identified by an investigative panel, commissioned by Olympus, as the main culprits in the fraud, seeking to delay the reckoning from risky investments made in the late-1980's bubble economy.

The scandal was exposed in October by then-chief executive Michael Woodford, who was sacked by the Olympus board after querying dubious M&A deals later found to have been used to conceal the losses. Mr Woodford campaigned to win his job back, but gave up that bid last month, blaming cosy ties between management and big Japanese shareholders and citing the strain on his family.

"After going to hell and back, this is a day to remember," Mr Woodford said in an email today. The Briton, who was a rare foreign CEO in Japan, plans to write a book about his experiences uncovering the scandal.

The arrests come as investors focus on who will run the once-proud company when its management steps down at an April 20th shareholders meeting, and whether Olympus will seek a capital tie-up to fix its balance sheet.

Olympus is banking on that April meeting marking a turning point in the scandal, with at least six of its 11-member board, including current president Shuichi Takayama, set to resign.

His successor is likely to be one of three board members the panel said were not responsible for the cover-up - Masataka Suzuki, Kazuhiro Watanabe and Shinichi Nishigaki - said a source familiar with the matter, who did not want to be identified due to the sensitivity of the issue.

"The arrests of former executives won't impact possible tie-ups with Terumo, Sony, Fujifilm and others," said a sell-side equity manager at a Japanese firm, who did not want to be named as he is not authorised to talk to the media.

"Olympus continues to be very attractive to other companies because of its endoscope business."

Last year, the investigative panel found Mr Kikukawa, Mr Mori and Mr Yamada had played leading roles in a 13-year scheme to hide the losses, and they are among 19 executives Olympus is suing over the scandal.

The panel said it found no evidence of involvement by organised crime, despite speculation that "yakuza" gangsters were somehow involved in the cover-up scheme.

An Olympus spokesman said the company would cooperate fully with the investigative authorities. It is also under investigation by law enforcement agencies in Japan, Britain and the United States.

Olympus in December filed five years' worth of corrected financial statements plus overdue first-half results, revealing a $1.1 billion dent in its balance sheet, triggering talk it would need to merge or forge a business tie-up to raise capital.

Reuters

DJ Update: Japan Post largest trade deficit on record in Jan

-- Japan posts largest monthly merchandise trade deficit on record due to weak exports and high fossil fuel imports

-- The deficit was the fourth straight month of shortfall and closely matched the figure expected by economists

-- The data could add to expectations Japan may suffer another annual trade deficit in 2012, following its first yearly shortfall since 1980 last year

Takashi Nakamichi
Of DOW JONES NEWSWIRES

TOKYO (Dow Jones)--Japan posted its largest monthly merchandise trade deficit on record in January, as exports to China and Europe fell sharply while imports surged due to stronger fossil-fuel demand to make up for reduced nuclear power output.

Ministry of Finance data showed Monday that Japan had a merchandise trade deficit of Y1.475 trillion for the month. That eclipsed the previous record of Y967.9 billion in January 2009, when the global financial crisis ravaged Japanese exports. It was also three times the level of the same month a year ago.

It was the fourth straight monthly shortfall, and largely in line with a Y1.468 trillion deficit expected by economists surveyed by Dow Jones Newswires and the Nikkei. In December, Japan posted a Y205.6 billion deficit.

"The numbers were basically within expectations," says Hideki Matsumura, senior economist at The Japan Research Institute, as weak exports to Europe and Asia pulled down the overall figures, offsetting a nascent recovery in exports to the U.S. "I don't think deficits of this scale will continue," he added.

Exports fell 9.3% on year, the fourth straight month of decline as demand for semiconductors and steel weakened, the ministry said. The decline was exactly in line with economists' forecast.

Imports gained 9.8% from a year earlier, the 25th straight month of growth. Imports of liquid natural gas, crude oil and coal all increased.

Japan's exports to China fell 20.1%, resulting in the biggest deficit with that country on record. Exports to the rest of Asia fell 13.7%, while those to the U.S. gained by a modest 0.6%. Those to Europe fell by 7.7%.

"We expected that the trade balance would be at its trough around the change of the year due to the global economic slowdown and the Lunar New Year holiday," said Takahide Kiuchi, chief economist at Nomura Securities. Trade with Asian countries was slightly weaker than expected, however, he added.

Monthly trade deficits should decline toward April-June as exports of electronics, to Asia, and autos to the U.S. and Europe improve, Kiuchi said. But if crude oil prices stay at current levels, the trade balance will likely remain in the red throughout the year, he said.

Indeed, the latest data may add to expectations that Japan may suffer another annual trade deficit in 2012, following its first yearly shortfall since 1980 last year. The yen's historic strength and a global slowdown continue to weigh on exports, while Japan's increased reliance on foreign fossil fuels to generate power is boosting imports.


-By Takashi Nakamichi, Dow Jones Newswires; 813-6269-2781; takashi.nakamichi@dowjones.com

(END) Dow Jones Newswires
February 19, 2012 20:01 ET (01:01 GMT)
Copyright (c) 2012 Dow Jones & Company, Inc.

S&P warns Japan on debt, affirms AA- rating

By Stanley White

TOKYO | Mon Feb 20, 2012 7:20am GMT

(Reuters) - Standard & Poor's warned on Monday it could lower Japan's sovereign rating if the economy expands less than expected or if public debt continues to grow, as the country's unpopular government struggles to win support for higher taxes.

The ratings agency affirmed its AA- rating on Japan with a negative outlook, but also warned that higher taxes wouldn't solve the structural problems that push up Japan's welfare spending and increasingly pressure state coffers.

Japan's debt burden is the heaviest among industrialised economies, and it may not be able to postpone drastic spending cuts and aggressive tax hikes much longer as Europe's debt crisis threatens the global economy.

One problem is that Japan's ruling Democratic Party lacks the majority needed to override opposition in parliament, so policy making often moves at a slow pace.

"In this environment, it's difficult to get opposition parties to agree to policies that will increase the burden on the public," Takahira Ogawa, director of sovereign ratings at Standard & Poor's in Singapore, said on a conference call.

"This difficulty in pushing through policies is a negative for Japan's sovereign rating."

S&P and Fitch both rate Japan AA- with a negative outlook. Moody's Investors Service ranks Japan at the same level, at Aa3, but has a stable outlook.

All three agencies rate Japan three notches below the top AAA rating.

Japan's rating could fall if real gross domestic product growth per capita drops below S&P's forecast of 1.2 percent, according to a statement released earlier.

S&P also expressed concern that the government isn't doing enough to bring down its debt quickly enough.

"We would also consider lowering the long- and short-term ratings if the government's debt trajectory remains on its current course or begins to erode the nation's external position," S&P said in the statement.

"On the other hand, we may revise the outlook to stable if the government were to implement robust and sustainable fiscal consolidation."

Late last year, the ruling Democratic Party agreed on a timetable on increases in the sales tax to pay for welfare spending. It said it would increase the 5 percent sales tax to 8 percent in April 2014 and then to 10 percent in October 2015.

SINKING RATINGS

Prime Minister Yoshihiko Noda needs opposition votes to pass the tax hike in a divided parliament, but his public approval ratings are sinking and the opposition is refusing to cooperate as it looks to force an election.

Higher taxes could help reduce revenue shortfalls, but that wouldn't change Japan's ageing population, which continuously pushes up welfare costs, S&P said.

Japan's sovereign ratings are also constrained by the government's weak policy foundations, the ratings agency said.

Even if the sales tax rises to 10 percent, that would not be enough to lower the ratio of public debt to gross domestic product, which is the highest among industrialised nations and almost twice the size of Japan's $5 trillion economy, government estimates show.

"Without broad-based welfare reform and higher economic growth, tax hikes alone won't lead to lasting progress in improving Japan's public finances," Ogawa said.

Japan's rating does draw support from its ample holdings of external assets in its foreign exchange reserves and its current account surplus, S&P added.

(Additional reporting by Mayumi Negishi; Editing by Joseph Radford and Richard Borsuk)