S&P threatens new Japan downgrade

 
City A.M. Reporter
Standard and Poor's threatened to cut Japan's sovereign credit rating again, warning the huge cost of last month's devastating earthquake will hurt already weak public finances unless bickering politicians can agree to raise taxes.

It affirmed its long-term sovereign credit rating on Japan at AA minus – the lowest among the major agencies – but cut the outlook to negative from stable.

The ratings agency cut Japan's sovereign credit rating in January for the first time since 2002, saying the government had no plan to deal with its mounting debt while adding the administration's loss of an upper house majority had compounded the problem.

Public debt, already twice the size of the $5 trillion (£3.03 trillion) economy, is set to grow further as the country faces reconstruction costs following the 11 March earthquake and tsunami that could reach 50 trillion yen ($613bn), S&P said.

"If there are no revenue enhancing measures such as tax increases, we expect the central and local governments to bear most of this cost," the agency said.

However, the country's deepest crisis since World War Two has not healed rifts between the government and the opposition, whose majority in the upper house stands in the way of fiscal reform.

In addition, Prime Minister Naoto Kan's deep unpopularity means that even within his party, he has little room for manoeuvre to shore up the country's public finances.

"This will put more pressure on the Japanese government to do something about revenue enhancement," Takuji Okubo, chief economist at Societe Generale, said.