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Moody's Cuts Japan's Sovereign Debt Rating Again

Japanese investors seemed unperturbed by the second downgrade in two years.

TOKYO -- Are Japanese investors in denial about their economy, or do they know something that's escaping

Moody's Investors Service


Tokyo's stock and bond markets both jumped higher Friday despite Moody's slashing Japan's sovereign debt rating to AA2 (its third-highest rating) from AA1. Citing problems with the high spending rate of the Japanese government to prop up the economy, Moody's also said the outlook for the rating remained negative. This is the second time the firm has cut Japan's rating in two years.

"The negative outlook (is) prompted by policy shortcomings and structural problems that have resulted in a level of government indebtedness that has become the highest, relative to gross domestic product, among the advanced industrial economies," Moody's analysts Vincent Truglia and Tom Bryne said in a statement. Most experts reckon Japan's debt ratio will be around 136% by the end of March 2001.

Basically, the ratings agency is saying that the Japanese government, after spending 117 trillion yen ($1.1 trillion) since 1992 to prop up the economy, had better come up with a better idea to improve the state of the economy than spending taxpayer money on construction projects. And the economy isn't the only issue the government must deal with, Moody's says. Because Japan's elderly population is increasing rapidly as well, the government will have to find more money in the years ahead to pay for its national pension and health programs.

That said, why did investors ignore Moody's rate cut when the firm cites reasons that many other economists and financial experts are also concerned about? First, talk that Moody's would downgrade Japan's rating was rampant from the start of the year. Put simply, the move was expected.

In addition, Japanese markets have long ignored Moody's warnings -- for better or for worse -- because most investors in government bonds and stocks are Japanese nationals who have little appetite for investing in riskier assets overseas. Buoyant economic data released over the past several months also backed up the bulls, including higher summer bonuses, and there are expectations of a surge in industrial production figures for August.

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Traders also figure that corporate profits for the fiscal first half, which will start to be released in October, will jump 14% overall from levels seen the same time last year. That good news is hard to ignore.

"With second-quarter

gross domestic product to be released Monday, I think the market is more in tune with economic fundamentals," says Masaaki Higashida, deputy general manager at

Nomura Securities

. Higashida reckons second-quarter GDP will show a 0.8% growth rate from the previous quarter, or a 3.1% annualized rise.

Finally, many players also pointed out that rival rating agency

Standard & Poor's

-- which reiterated its AAA rating today -- doesn't see a problem.

"The sovereign rating continues to be supported by Japan's position as the world's wealthiest net creditor nation in absolute terms as well as its diverse, high-income economy," said S&P analyst Takahira Ogawa.