Japan in fresh downgrade warning

City A.M. Reporter
Japan's economy offered more signs of recovery from the deadly March earthquake, but Moody's ratings agency warned both growth and government action may fall short of what is necessary to bring Tokyo's ballooning debt back under control.

Industrial output rose one per cent last month after a record plunge immediately after the magnitude 9.0 quake and a tsunami it set off, and companies said they planned to further crank up output in May-June, bringing it close to pre-disaster levels.

The upbeat outlook spurred talk that the world's third-largest economy could be poised for a V-shaped recovery after the disaster knocked Japan back into its second recession in three years and a third downturn in a decade.

Manufacturers' optimism, however, failed to impress Moody's which on Tuesday put Japan's sovereign debt on a watch for a possible downgrade, citing huge costs of dealing with the quake's aftermath and concerns that the government's response to economic challenges may prove inadequate.

"The much larger than initially expected economic and fiscal costs of the March 11 earthquake are magnifying the adverse effects imparted by the global financial crisis from which Japan's economy has not completely recovered," Moody's said.

The rating agency cut Japan's outlook to negative in February and moved one step closer to a possible downgrade by putting its Aa2 rating on review.