Japan’s latest effort to escape deflation and revive economic growth is a drastic departure from the policies of previous governments, Standard & Poor’s Ratings Services said in a report published today.
At this stage, however, a more than one-third chance remains that we will lower our ‘AA-’ long-term sovereign ratings on the nation.
The continuing prospect of a downgrade arises from risks associated with recent government initiatives and uncertainty of their success. Japanese Prime Minister Shinzo Abe’s plan to lift Japan out of deflation and spur economic expansion–known as “Abenomics”–has three pillars: bold monetary easing, fiscal efforts to spur growth, and a strategy to induce private sector investment. Of the three engines that Mr. Abe foresees reinvigorating the nation’s economy, so far only one, monetary easing, has kicked into full gear. The others remain idle.
The Bank of Japan’s (BOJ) monetary policy committee aims to achieve 2% growth in the Consumer Price Index within two years by doubling its monetary base with a twofold increase in outright purchases of Japanese government bonds (JGBs) and a doubling of its total assets by the end of 2014.
The BOJ announcement has already triggered a depreciation of the yen’s value against other major currencies, propelled stock market indices to an almost five-year high, and lowered yields on JGBs to all-time lows. The yield on 10-year JGBs fell to 0.315% on April 5, immediately after new BOJ Governor Haruhiko Kuroda unveiled details of the new monetary policy, which included more comprehensive measures to increase liquidity and greater BOJ demand for government bonds than the market expected. However the yield momentarily rebounded to 0.62% the same day, indicating market nervousness about the historic low yield and future upside risks. Since then the yield has hovered around 0.6%, still low considering the risk of higher inflation and interest
Market participants seem to think monetary easing is an opportunity to buy government bonds because BOJ purchases will spur demand in the immediate future, while an inversion of bond yields, together with inflation, will take time to emerge.
For more see the full report No Risk, No Gain: Japan’s Credit Quality Hinges On Its Bold Strategy To Reignite Growth $$