By Lisa Twaronite, MarketWatch
TOKYO (MarketWatch) — Standard & Poor’s cut its outlook on Japan’s sovereign rating to negative from stable on Wednesday to reflect the potential for a downgrade if the country’s fiscal situation deteriorates more than expected in the wake of last month’s disaster.
S&P said it expects costs related to the March 11 earthquake, tsunami and nuclear crisis to increase Japan’s fiscal deficits above prior estimates by a cumulative 3.7% of gross domestic product through 2013.
“We revised the outlook on the long-term rating on Japan to negative to reflect the potential for a downgrade if fiscal deterioration materially exceeds these estimates in the absence of greater fiscal consolidation,” the rating agency said in a statement.
Much depends on Japan’s political leadership and its ability to forge consensus on how to offset fiscal measures in the future, the agency said.
“As long as there are no revenue-enhancing measures such as tax increases, we currently project that reconstruction costs could range from 20 trillion yen ($245 billion) to ¥50 trillion, with ¥30 trillion being our central forecast,” S&P said.
The extent of environmental contamination in northeastern Japan from Tokyo Electric Power Co.’s JP:9501 -3.29% TKECY -4.00% quake-damaged Daiichi Fukushima nuclear power plant “remains unknown,” it said, as do other long-term effects of the disaster.
“Although we expect no lasting damage to Japan’s supply chains, some manufacturers could decide to move a greater share of production offshore,” S&P said.
“Combined with the headwinds of intermittent deflation and a fast-aging population, Japan will be challenged to raise its real [gross domestic product] growth potential much above 1% annually over the medium term, in our view,” it said.
Still, it said, Japan’s sovereign ratings are supported at the AA-minus level by “the country’s ample net external asset position, relatively strong financial system, and diversified economy.”
The yen weakened against the U.S. dollar USDYEN +0.3680% after the announcement, with the greenback rising to ¥81.68 yen, compared with ¥81.55 yen in late North American trading Tuesday.
Last week, S&P also cut its ratings outlook on the U.S. to negative from stable, noting an increasing gap between a lack of action by U.S. fiscal-policy makers and steps taken by its AAA-rated peers. Read more on U.S. rating outlook.
