S&P cuts Japan outlook to negative

Ratings agency Standard & Poor’s yesteday cut its outlook on Japan’s sovereign debt following last month’s quake-tsunami disaster and warned that reconstruction costs could pass $600 billion.

It said, however, that the March 11 disaster, which obliterated whole towns on the northeast coast, left 26,000 people dead or missing and triggered a nuclear crisis, would not hurt Japan’s medium-term growth potential.

The credit ratings agency said the cost of rebuilding could range from 20 trillion yen to 50 trillion yen ($245 billion to $612 billion). It said 30 trillion yen was its central forecast, if there are no measures to boost revenue, such as tax increases. The figure is somewhat higher than government estimates of as much as 25 trillion yen, not including the nuclear accident.

“Although we do not expect the disasters to materially hurt the country’s medium-term growth potential,” Standard & Poor’s said it forecast that the calamity would increase Japan’s fiscal deficit.

“Standard & Poor’s expects costs related to the March 11, 2011 earthquake, tsunami and nuclear power plant disaster will increase Japan’s fiscal deficits above prior estimates by a cumulative 3.7 per cent of GDP through 2013,” it said in a statement.

The ratings agency cut the outlook on its Japan debt rating to negative from stable. “The negative outlook signals that a downgrade is possible if Japan’s public finances weaken further over the next two years in the absence of fiscal consolidation to offset them.

“We believe that uncertainty over the country’s fiscal and economic outlook will lessen over the next six to 24 months.”

The ratings agency affirmed its long-term sovereign credit rating at “AA-”.

S&P’s announcement comes as Japan struggles with the industrialised world’s biggest debt, at around 200 per cent of GDP, after years of pump-priming measures by governments trying in vain to arrest the economy’s long decline.

Finance Minister Yoshihiko Noda did not comment on the S&P outlook downgrade but said the country had to balance reconstruction needs with fiscal reform.

“We managed to secure financial resources (for an extra quake budget) without issuing new government bonds,” he said.

“We will keep this stance in principle and make efforts to retain domestic and international confidence in our economy and finances.”

The ratings agency said: “If the government’s debt trajectory remains on its current course or begins to erode the nation’s external position, the long- and short-term ratings could be lowered.”

Standard & Poor’s warned that its projections were “uncertain” due to ongoing developments at the Fukushima nuclear power plant, where workers are battling to cool reactors and spent fuel rod pools to prevent a meltdown. “Much will depend on Japan’s political leadership and its ability to forge a political consensus on how to offset fiscal measures in the future,” it said.

“The extent of environmental contamination in northeastern Japan remains unknown.”

The nuclear disaster, the world’s worst since Chernobyl 25 years ago, has caused electricity shortages while the quake and tsunami damaged and destroyed production facilities and infrastructure, disrupting supply chains.