Japan hit by unemployment rise and credit rating threat

Moody’s places Japan’s Aa2 rating under review while jobless rate rises for first time in six months Japan’s hopes of bouncing back from the economic turmoil caused by March’s earthquake and tsunami have been knocked by the threat of a credit rating downgrade from Moody’s, and a rise in unemployment. Moody’s warned on Tuesday that the devastation that struck Japan seven weeks ago is making it even harder for the country to recover from the financial crisis. It put Japan’s Aa2 rating – the rating agency’s third-highest rating – on review for a possible downgrade, adding that there was a “low chance” of a multi-notch downgrade. “The much larger than initially expected economic and fiscal costs of the 11 March earthquake are magnifying the adverse effects imparted by the global financial crisis from which Japan’s economy has not completely recovered,” Moody’s said. Tom Byrne, the ratings agency’s senior vice president and regional credit officer, added that a downgrade was likely even if Japan’s government manages to agree a new fiscal plan. The move was greeted pragmatically by the Japanese government. Economy minister Kaoru Yosano said Moody’s move was “not a happy story to hear”, admitting that it piled more pressure on Japan to improve its finances. “This should be interpreted to mean the market is urging the Japanese government to bring its fiscal condition back to health,” said Yosano. Moody’s credit review was announced just hours after the Japan’s unemployment rate rose for the first time in six months, to 4.7%. This data excluded the three areas most badly affected by the earthquake, suggesting that the actual increase in joblessness could be higher. Japan has already been dragged back into recession by March’s earthquake , with GDP shrinking by 0.9% in the first quarter of 2011. Economists had hoped that the country would stage a V-shaped recovery, but other data released on Tuesday cast doubt on this. Factory output rose by 1% in April, half the 2% increase predicted after the 15.5% plunge in output recorded in March. Exporters have been badly hit, with shipments of new vehicles down by 67% last month. Tax reforms awaited The earthquake reconstruction bill was last estimated at 15tr yen (£111bn), which could add to a national debt that is already double Japan’s GDP. Prime minister Naoto Kan is attempting to persuade Japan’s parliament to approve budget measures to pay for the rebuilding work. However, Kan is facing a no-confidence vote on Wednesday, with some members of his own party calling for a new leader who could push the necessary measures though. Japan is due to announce an overhaul of its tax and social security systems in June. The International Monetary Fund has urged the country to raise its sales tax, currently pegged at 5%, while other bodies have warned that spending on medical care and pensions must be cut back. Under its existing fiscal consolidation plan, Japan was aiming to eliminate its annual budget deficit by 2020. Rating agency Fitch criticised this plan last Friday , calling it “too leisurely”, as it lowered its outlook on Japan from stable to negative. On Tuesday the yen fell against other major currencies to a three-week low. But Moody’s threatened downgrade had no obvious impact on the cost of insuring Japan’s debt, which was unchanged. The five-year credit default swap on Japanese debt remained at 86 basis points, according to Markit. Japan’s debt-to-GDP ratio is widely seen as sustainable, at least in the short-term, as so much of its bonds are bought up by domestic investors. Global economy Ratings agencies Financial sector Economics Japan disaster Japan Graeme Wearden guardian.co.uk

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