Japan’s sovereign rating was cut by one notch by Fitch on Tuesday as a political stalemate dims the chance that the country can curb its snowballing debt.
Fitch lowered Japan’s long-term foreign currency rating to A-plus from AA. It cut the local currency ratings to A-plus from AA-minus. Both were cut with a negative outlook.
Fitch warned that further downgrades are possible unless the government takes new fiscal policy measures to stabilize public finances and its ratio of debt to gross domestic product.
The yen fell after the move, taking the dollar to a session high of ¥79.85.
The downgrade could serve as a chilling reminder to highly indebted countries in Europe that urgent action is needed to trim public debt and prevent concerns about sovereign debt from weighing further on the global economy.
“The downgrades and negative outlooks reflect growing risks for Japan’s sovereign credit profile as a result of high and rising public debt ratios,” Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch said in a statement.
“The country’s fiscal consolidation plan looks leisurely, relative even to other fiscally challenged high-income countries, and implementation is subject to political risk.”
Fitch’s A-plus rating for Japan is the lowest among the three major ratings agencies. Moody’s Investors Service rates Japan Aa3 with a stable outlook. Standard & Poor’s rating for Japan is AA minus with a negative outlook.
At the end of March, Japan’s government submitted laws to double its sales tax by 2015 to fund swelling social security costs in the world’s fastest-aging nation, setting up a showdown that could split the ruling party, force early elections and deepen policy paralysis.
Prime Minister Yoshihiko Noda has staked his political career on the tax plan, but the chances of success look slim. Opposition parties are unwilling to co-operate, and the government lacks the numbers to force legislation through.
Japan’s debt burden, at twice the size of its $5-trillion economy, is by far the worst among industrialized countries
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