Japan’s Long-Term Rating Outlook Cut to Negative by Fitch

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Fitch Ratings cut the outlook on Japan’s sovereign debt rating to negative from stable while keeping the rating unchanged, following a similar move last month by S&P Global Ratings.

“The coronavirus pandemic has caused a sharp economic contraction in Japan, despite the country’s early success in containing the virus,” Fitch said in a statement Wednesday.

“Sharply wider fiscal deficits in 2020 and 2021, as we project, will add significantly to Japan’s public debt, which even before the pandemic was the highest among Fitch-rated sovereigns as a share of GDP,” the ratings firm added.

Japan’s policy makers, like their global peers, are wrestling with spiraling deficits after ramping up spending to fight the impact of Covid-19. Virus cases have risen recently in Tokyo and a slow economic recovery could prompt more government stimulus.

Fitch affirmed Japan’s rating of A for long-term debt. But the firm sounded alarms over the country’s rising number of Covid-19 cases, and the possibility of further containment measures and risks to the economic outlook.

The ratings report had little impact on the yen, which was trading at around 105.07 per dollar Wednesday in Tokyo.

Markets could be negatively affected, though, if moves by the ratings firms spread to impact the country’s banking sector, according to Shunsuke Oshida, a senior credit analyst at Manulife Asset Management.

“If bank ratings are also downgraded, it could raise banks’ dollar procurement costs,” he said.

Japan has pushed up its tally of economic measures to combat the virus impact to around $2 trillion, roughly 40% of the size of its economy.

Still, Fitch and other ratings firms recently said there probably wouldn’t be any ratings consequences if the government drops a pledge to balance its budget by 2025. The bigger concern, they said, was how fast the economy can recover from the pandemic.

Credit Ratings Firms Unlikely to Act if Japan Drops 2025 Goal

Tokyo saw a new daily record in cases last week, prompting the capital’s governor, Yuriko Koike, to ask residents to stay home over last week’s long holiday weekend.

Fitch projects Japan’s economy to contract by 5% for the full year in 2020, before rebounding to 3.2% growth next year. But the firm didn’t expect GDP to return to pre-pandemic levels until the fourth quarter of 2021.

“Ratings firms’ outlooks being cut to negative doesn’t change Japan’s fiscal reality, and it doesn’t move the market as a new factor,” said Noriatsu Tanji, chief bond strategist at Mizuho Securities Co. “This time there was no downgrade in the rating, and even if there was, as long as its within the A rating there’s little possibility it’ll trigger a digital sell-off.”

©2020 Bloomberg L.P.

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