S&P downgrades Japan`s sovereign credit rating

Tokyo: Ratings agency Standard & Poor`s on Wednesday downgraded its sovereign credit rating on Japan by one notch, saying the government had little chance of turning round the economy or weak inflation in the coming years.

The move comes the day after the Bank of Japan held fire on expanding its already vast monetary easing programme, although economists warned more stimulus could be needed to boost the sagging economy.

The central bank`s 80 trillion yen ($665 billion) annual asset-buying scheme was a key pillar of a policy blitz launched by Prime Minister Shinzo Abe to kickstart Japan`s moribund economy and conquer deflation.

But more than two years later, the premier is struggling to make good on his pledges to cut red tape and open up the economy, while inflation remains near zero and growth actually contracted in the second quarter.

"We believe that the government`s economic revival strategy -- dubbed `Abenomics` -- will not be able to reverse this deterioration in the next two to three years," the agency said.

"Economic support for Japan`s sovereign creditworthiness has continued to weaken in the past three to four years," S&P said, adding that "slow decision-making among policy institutions (are) somewhat impairing policy implementation".

Japan is the developed world`s most indebted country, with debt more than two times the size of its economic output, and S&P forecast that would reach 135 percent of GDP by the 2018 fiscal year, from 128 percent this year.

The agency cut its rating on Japan`s debt to A+ from AA-, placing it below regional rivals China and South Korea.

S&P is the last of the big three ratings agencies to cut its grading for Japan since Abe came to power, after Fitch downgraded in April and Moody`s in December, both citing concerns about towering debt and sluggish growth.

Masaki Kuwahara, an economist at Nomura Securities Co. in Tokyo said Wednesday`s cut was not a surprise given Tokyo`s deteriorating credibility at managing the world`s third-largest economy.

"The government`s fiscal reform plan released in June lacked details and specifics, making it look unreliable on how to ensure fiscal sustainability," he told Bloomberg News.

"Today`s downgrade is a message that the government will need to have a more credible fiscal reform plan."

S&P`s said that while Japan remains a high-income country with a stable financial system, its ageing population and persistent deflation were exacerbating its already "very weak fiscal position".

"We believe the likelihood of an economic recovery in Japan strong enough to restore economic support for sovereign creditworthiness commensurate with our previous assessment has diminished," S&P said.

Lowering credit ratings generally makes it more expensive for governments to borrow, but S&P said the central bank`s huge asset purchases have kept costs down. The BoJ now holds around 30 percent of national debt.