S&P downgrades Japan, doubts Abenomics can soon reverse deterioration

TOKYO (Reuters) - Ratings agency Standard & Poor’s on Wednesday downgraded Japan’s credit rating by one notch to A+, saying economic support for the country’s sovereign creditworthiness had continued to weaken in the past three or four years.

A woman looks at screens displaying, stock quotes, the Nikkei average and the Dollar to Yen exchange rate outside a brokerage in Tokyo, August 25, 2015. REUTERS/Thomas Peter

S&P cut its rating on Japan from AA- to A+, which is four notches below its top rating of AAA. The agency raised its outlook from negative to stable.

It was the first Japan downgrade by S&P since January 2011 and came 4-1/2 years after it last lowered its outlook, from stable to negative.

The downgrade brings its Japan rating into line with rival Moody’s Investors Service, which downgraded Japan to A1 in December last year. Fitch Ratings cut its rating on Japan by one notch to A in April.

The yen JPY= shrugged off the lowering of the credit rating. It briefly fell but then regained ground.

“We believe the likelihood of an economic recovery in Japan strong enough to restore economic support for sovereign creditworthiness commensurate with our previous assessment has diminished,” S&P said in a statement.

“Despite showing initial promise, we believe that the government’s economic revival strategy - dubbed ‘Abenomics’- will not be able to reverse this deterioration in the next two to three years,” it added.

The world’s third-largest economy shrank in the April-June quarter, and analysts expect any rebound in the current quarter to be modest as private consumption remains weak and China’s slowdown dampens prospects for a solid recovery in exports.

Prime Minister Shinzo Abe’s government aims to return to a primary budget surplus in fiscal 2020 and then lowering the debt-GDP ratio, which is the worst in the world, at around twice the size of the country’s $5-trillion economy.

Abe is putting more emphasis on economic growth and the higher tax revenue it brings, rather than austerity, to achieve the budget-balancing goal.

“S&P’s diagnosis about the uncertain economic outlook means that prospects for fiscal consolidation are becoming uncertain,” said Toru Suehiro, senior market economist at Mizuho Securities.

“Given that monetary and fiscal policies are stretched and it takes time to implement the ‘Third Arrow’ reform, Abe appears unlikely to find a way out of the doldrums any time soon, unless external demand turns for the better miraculously.”

A finance ministry official said it had no plan to issue a statement.

The S&P downgrade came the day after the Bank of Japan stood pat on policy, casting doubt about the central bank’s optimism.

BOJ Governor Haruhiko Kuroda voiced confidence that the economy can weather the hit from China’s slowdown and weak demand in the rest of Asia, suggesting that he sees no immediate need to expand stimulus further. [ID:nL4N11L18G]

Editing by Clarence Fernandez