Japan’s fiscal policy shows signs of stress

Moody’s Investors Service downgraded Japan’s credit rating  today  from A1 to Aa3  with a stable outlook over a heightened uncertainty of whether Japan could:

1. Achieve its fiscal deficit reduction goals.

2. An uncertainty over the timing and effectiveness of growth enhancing policy measures in a deflationary environment.

3 The increased risk of rising Japanese government bond B yields and reduced debt affordability  in the medium term.

Moody’s downgrade comes after Prime Minister Shinzo Abe decided last month to delay  the 10% national sales tax that was scheduled to take effect in 2015. The reason for the delay was the calling of a snap election to ensure popular support for his economic policy.

Financial Impact and Effects

The Bank of Japan buys trillions of yen worth of Japanese bank bonds each month as part of their recent quantitative easing program. Moody’s rating downgrade will make it more difficult for the Bank of Japan to expand this bond buying program in the future and if the Aa3 rating is extended too long, it could have a negative effect on the Japanese economy and investment.