Japan Faces Possible Credit Downgrade

Standard & Poor’s and Fitch are warning Japan of possible credit rating downgrades, after an election humbling raised fears about the government’s commitment to fiscal reform.

S&P said late Monday that it may cut Japan’s sovereign debt rating if the mountain of red ink grows or there is a lack of concrete policy steps, while Fitch joined the chorus Tuesday.

Voters appeared to reject Prime Minister Naoto Kan’s plans to reduce Japan’s near $10 trillion in debt, likely with a hike in the sales tax.

Still. Japan’s finance minister said Tuesday the country needs to overhaul its tax system, despite the loss of an upper house majority in Sunday’s election.

Kan’s DPJ will need help from smaller parties, but Temple Professor Phil Deans says don’t expect much.

[Prof. Phil Deans, Temple University]:
„Yet again, the world’s second largest economy has got a weak leadership, it’s got uncertainty; there’s no clear clear direction for Japan. I think people have given up on any chance of seeing Japan exercise any leadership, but they at least want it to have some kind of stability, some attempt at addressing its domestic problems.“

Japan’s economy has been recovering from the financial crisis, but rating agencies and analysts wonder whether there is the political will now to raise taxes.

The DPJ won power in a landslide last August, but rapidly lost support after Kan suggested less than a month ago a hike in the consumption tax to 10 percent.

Focus now is on whether the government can hold the line on borrowing in its upcoming budget, with a cap of 71 trillion yen, or more than $800 billion.

Foto: NTDTV