If Abenomics is a three-legged stool, Standard & Poor’s Ratings Services just cut out one of the legs.
S&P, one of the world’s biggest credit-ratings agencies, sliced Japan’s credit rating to A+ from AA- on Wednesday. It said the long-term outlook was stable.
“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,” said the announcement.
Abenomics is the economics policy Prime Minister Shinzo Abe instituted three years ago to bring Japan out of its economic malaise. While it’s had some success, it’s been more a pattern or fits and starts.
Meanwhile, Japan’s problems are growing. Last quarter, the economy contracted, inflation remains near zero, and debt continues to rise as the population ages. The International Monetary Fund estimates public debt will increase to about 247% of gross domestic product next year.
S&P’s move comes just one day after the Bank of Japan said it wouldn’t increase its record asset purchases, which were a main source of pulling Japan out of its deflationary spiral.
The BOJ’s monetary stimulus has been one of the three legs of the Abenomics stool. With that out of the equation for the near term, this means the Japanese government needs to approve a fiscal stimulus to get the lackluster economy moving again.
The ratings agency has little faith in this succeeding. It said that “despite showing initial promise, we believe that the government’s economic revival strategy–dubbed ‘Abenomics’–will not be able to reverse this deterioration (in weak average economic growth and weak price trends) in the next two to three years.”
“The government’s fiscal reform plan released in June lacked details and specifics, making it look unreliable on how to ensure fiscal sustainability,” Masaki Kalahari, an economist at Nomura Securities in Tokyo told Bloomberg. He said the downgrade wasn’t a surprise after a cut by Moody’s Investors Service in December. “Today’s downgrade is a message that the government will need to have a more credible fiscal reform plan.”
Today’s move means that Japan’s two key economic rivals — China and South Korea — are both rated higher by S&P. Citing South Korea’s sound fiscal position and relatively strong economic performance, S&P on Tuesday raised the country’s rating to AA-.