Standard & Poor’s Rating Agency has cut Japan’s long-term sovereign rating this morning by one step to AA- from AA. Japan's rating outlook is now stable reflecting its view that "Japan's strong external balance partially offset the pressures stemming from the fiscal side". S&P said that Japan probably can’t achieve primary balance by 2020 and that their fiscal deficits will likely stay high through next few years. The high level of debt is likely to reduce the government's already weak fiscal flexibility, S&P said.
This was the first cut since 2002 and comes amid concerns that the Prime Minister, Naoto Kan, isn’t doing enough to lower the world’s largest debt load. The rating’s agency added that the ruling DPJ party lacks a “coherent strategy” to address debt problems.
The yen was immediately weaker dropping almost 1% against the dollar, all cross/Jpy pairs were also significantly higher after the news. The affect was felt across the market as the strengthening dollar against the yen registered gains against other majors across the board. The 50-day SMA lies at 83.10 a clear break of this level could indicate a more meaningful shift in the pair over the medium-term.
Fitch entered the fray this moring after the downgrade saying that its key for Japan for focus on political cooperation in 2011, adding that they need a more credible fiscal strategy.
Written by Jonathan Granby, DailyFX Research Team
If you wish to contact the author with comments of questions email jgranby@fxcm.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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