FEARS of a fresh sovereign debt crisis originating in Asia were fuelled yesterday by Standard and Poor’s decision to cut Japan’s credit rating to AA-.
“This supports our fears that 2011 will be the year when Japan’s dire fiscal position finally impacts markets both at home and abroad,” Julian Jessop of Capital Economics said.
“Given the size of Japan’s economy and the current sensitivity of global financial markets to sovereign debt concerns, the impact would be felt worldwide,” he warned.
If it fails to get its fiscal house in order, “further downgrades will surely follow,” added Jessop.
Japan’s public debt is twice the size of its $5 trillion (£3.1 trillion) economy, and the public purse faces increasing pressure from demographical change, S&P warned. Japan has the most elderly population in the world, the Office for National Statistics said recently.
The government faces a dilemma of how to cut the deficit without further stunting economic recovery, he said.
The yen fell against the dollar and euro after news of the Standard and Poor’s downgrade. Against the yen, the euro rose to 114.02 yen, up around one per cent on the day.