Monday, April 23, 2007

S&P Upgrade Outlook On Japan, Monday, April 23, 2007 5:27:10 AM

Monday, Standard & Poor`s Ratings Services said that it had raised its foreign and local currency long-term sovereign ratings on Japan to `AA` from `AA-`. The short-term foreign and local currency ratings were affirmed at `A-1+` and the outlook on the long-term ratings is made stable.

S&P said that the upgrade is based on Japan`s progress in fiscal, monetary, and structural fronts.

Government deficit to fall

According to S&P, Japan`s general government deficit is expected to fall to 5.0% of GDP in fiscal 2007 from 8.2% in fiscal 2002, due to the government`s steady fiscal-consolidation efforts. Government primary deficit is expected to improve to 0.2% of GDP in fiscal 2007, compared to 4.2% in fiscal 2003, it said.

`Our assessment is that they are meeting the test. We expect the ratio of general government debt (including the social security debt and government bonds for the Financial Loan Program) net of good-quality fiscal assets to GDP, to stabilize at 133% by fiscal year 2012,” S& P`s credit analyst Takahira Ogawa said.

“The major banks have been restored to good health, with the banking sector`s nonperforming loans falling to 2.7% of the total portfolio as of Sept. 30, 2006,` Ogawa added.

Economy to grow 2.0% next few years

According to the rating agency, Japanese economy is expected to grow 2.0% in real terms in the next few years, twice the level it had in a decade to 2004. The report also noted that the Bank of Japan has successfully exited its zero interest-rate policy by raising its policy rates by a quarter points each in July and February.

Bank of Japan Govoner Toshihiko Fukui remained upbeat on the Japanese economy and reiterated last week that the central bank will continue to manage policy in a timely manner based on developments of the economy and prices.

`We will continue to aim to achieve sustainable economic growth with stability in prices,` Fukui said at the opening of the central bank`s quarterly branch managers` meeting.

Current account surplus to continue to expand

Standard & Poor`s expects current account surpluses to further enhance Japan`s net external-asset position in the coming years. Japan`s current account surplus rose 4.9% in February, slower than the 49.8% year-over-year growth rate recorded in the prior month. Nonetheless, the February surplus amounted to 2.42 trillion yen versus 1.19 trillion yen in the prior month.

Japan`s position as the world`s largest net external creditor with an estimated net assets of US$2.0 trillion provide the government with ample external liquidity and good access to global capital markets, the report said.

S&P noted that Japan`s current gold and foreign exchange reserves of US$940 billion are second only to China`s.

Reforms should continue

S&P`s ‘stable` outlook is based on the expectation that the current government will continue its public sector reform. Although Japan has successfully reformed its defined-benefit pension fund system in 2004, the rating agency believed that more adjustments are necessary for the long-term sustainability of the system.

The agency noted that about 70% of its 86 trillion yen social security budget in fiscal 2004, equaling 17% of GDP, was channeled to programs for the aged. It expected the total social security budget to increase to 26% of GDP by fiscal 2025.

The agency hoped that faster than expected progress could improve the outlook on the sovereign ratings on Japan and any setback in government`s fiscal-consolidation efforts could put downward pressure on the rating.
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