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Home > Media Reiews > News Review Last Updated: 14:52 03/09/2007
News Review #29: May 7, 2002

So What If Japan Doesn't Like Its Credit Rating

Reviewed By Hitoshi URABE

"So What If Japan Doesn't Like Its Credit Rating"
by David DeRosa, Bloomberg

It was February last year when S&P deprived Japan of its AAA status. Since then the rating was lowered further two notches to "AA-minus" while Moody's were already at "AA3" since last year.

Apparently upset by behaviors of the rating agencies, Japan's Ministry of Finance sent written statements in protest to both Moody's and S&P, plus a European agency, arguing that Japan deserves better rating. Such an action by a government was very unusual and it was received with a shrug, effectively ignored by most of the market participants, and seemingly by the rating agencies as well.

The article introduced here explains very clearly once again why Japan's rating is being lowered as an ongoing process and how the Japanese Governments' criticism is unwarranted. It explains the flaw in Japan's argument that "defaulting on local-currency debt is unimaginable" which is based on the fact that vast majority of the debt is held domestically. By making reference to the experience of Argentina, the article stipulates that it was not really foreign debt but it was local debts the government had mistreated that eventually lead to the crisis. It goes on to summarize the essence concisely as follows:

"The point is governments have more latitude to abuse holders of local debt than they do investors in their international bonds. The locals have to take it; the foreigners have some leverage, by comparison."

Having majority of the investors locally is not a virtue. It is through foreign investors that an early warning mechanism supposedly built-in to a free market would function effectively, in contrast to where the anxieties of local investors could be suppressed in various ways, whether by intention or wishful thinking.

This is an article in blunt language, possibly unpleasant to the ears of many Japanese, not to mention bureaucrats at the Finance Ministry. But the points raised are valid. If Japan were to regain confidence among the international financial society, a lot more than arguing needs to be done.

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