S&P Issues a Warning on Japan's Credit Rating

Credit rating agency Standard & Poor's says it may downgrade Japan's current AA sovereign debt rating by one "notch," which would bring it to AA-. That's particularly noteworthy because Japan is either the world's No. 2 or No. 3 economy by GDP, virtually tied with China. S&P has officially changed its outlook on Japan's debt from stable to negative.In a statement S&P says an actual rating downgrade could occur "if economic data remain weak and measures to boost medium-term growth are not forthcoming, given the country's high government debt burden and its weak demographic profile." Japan's problems don't begin to approach those of Greece and Ireland, where national solvency is an issue. It does, however, point to the extent to which the debt of the world's largest and most developed economies are under scrutiny.

S&P and other credit rating agencies have recently expressed their concerns about U.S. and U.K. sovereign debt, however without directly threatening changes in their rating status.

But the problems in the largest Western nations are not unlike Japan's. The U.S. federal budget deficit is expected to rise by $8 trillion over the next decade. The actual figure may be somewhat higher or lower, depending on the source of the analysis. Still, any increase certainly means higher annual debt service, which will put additional strain on the nation's annual budgets.

Economic Growth Isn't Enough

S&P's worries about the creditworthiness of developed nations aren't rooted just in debt growth. The tremendous recession has laid low housing values and increased joblessness at a time when consumers are still carrying a great deal of debt. Some economists believe unemployment in the U.S. will remain high for three or four more years. Without a rebound in consumer spending, which seems unlikely, GDP growth and tax receipts will almost certainly stay weak. That means rapid economic improvement alone won't close the deficit .

Japan is a canary in the credit coal mine for the U.S. and U.K. And it has only very limited ways to solve the problem, such as raising taxes or cutting critical government services. Those unpopular measures aren't likely to be attractive alternatives for the politicians in any country who would have to propose and approve them.

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