On 23rd August 2011 something happened that until recently would have been unthinkable. Japan had its credit rating downgraded. Japan is just the latest economy to bear the brunt of the global problem of ballooning debt and the feel the pain of Moody’s shaving of their credit rating down to an AAA3. This followed just [...]
On 23rd August 2011 something happened that until recently would have been unthinkable. Japan had its credit rating downgraded. Japan is just the latest economy to bear the brunt of the global problem of ballooning debt and the feel the pain of Moody’s shaving of their credit rating down to an AAA3. This followed just one month on from the stripping of the gold plated AAA rating from the US and there is a growing panic that other economies will face similar downgrades. In particular many European countries are taking measures to protect their credit ratings in fear that the debt crisis that has resulted in major bail-outs of Greece, Portugal and Ireland will similarly engulf them.
The specific reason given by Moody’s that led to Japan’s downgrade was the large budget deficit and the increase of debt following the global recession of 2009 and the country’s specific problems in slowing the growth of the debt to GDP ratio.
The immediate impact was pressure on the Yen but that was very brief indeed and overall the currency seems to have weathered the storm. In fact it seems that in reality nothing happened at all, which many found surprising.
A major hindrance to growth of the Japanese economy is the strength of its currency. In order to address this and stimulate growth the government will transfer funds to Japan Bank for International Cooperation from the country’s FX reserves. The aim is to encourage smaller companies to maintain foreign currency earned on exports rather than immediately exchanging it for Yan. This will no doubt impact to some extent on currency values but this is likely to be small and fairly long term.
The reaction is very different to that that occurred with the dollar on the down rating of the US. Perhaps one reason for this is that with Japan the down grade came as no great surprise, whilst that of the US truly shocked the world.
One thing is certain: Japan will not be the last to suffer this ignominious fate, so be prepared.
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