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Japan’s Credit Rating Downgraded to A+ by Standard & Poor’s

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Japan’s credit rating downgraded to A+

On Wednesday, September 16, Standard & Poor’s (or S&P) downgraded Japan’s sovereign credit rating. Japan’s sovereign debt is now rated A+. The rating was downgraded by one notch from the AA- it held earlier. S&P stated, “Despite showing initial promise, we believe that the government’s economic revival strategy—dubbed ‘Abenomics’—will not be able to reverse this deterioration in the next two to three years.”

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Over the past year, the markets have already seen Moody’s and Fitch lower their sovereign credit ratings for Japan. With S&P lowering its credibility rating, investors in Japan-tracking ETFs such as the iShares MSCI Japan (EWJ) and the Wisdom Tree Japan Hedged Equity ETF (DXJ) may become wary of their holdings.

US companies (SPY) like Google (GOOG), Microsoft (MSFT), and Morgan Stanley (MS) also have a good presence in Japan. The rating downgrade might send a warning signal to these US multinationals.

S&P pointed to weak economic growth in Japan

Japan’s economic indicators have lost heat recently.

  • GDP (gross domestic product) in the country contracted by 0.3% in the second quarter. It expanded by 1.1% in the first quarter this year.
  • Despite the BoJ’s (Bank of Japan’s) monetary easing measures, inflation in the economy continues to be dismal. The inflation rate was recorded at 0.20% in July 2015, down from 2.3% in March 2015.
  • Japan’s debt situation hasn’t changed much. The humongous amount of public debt that Japan has on its balance sheet is the largest in the world. At about 30% of its GDP, even the medium term seems insufficient to lessen the burden for Japan, given the fact that Abenomics has already been at work for the past three years. Back in 2012, this figure stood at around 210% of GDP. Public debt has only increased since then.

Recently, the Bank of Japan lowered its third-quarter industrial production forecast for the economy. A slowdown in China and other emerging markets has been cited as a reason for the downgrade in outlook.

A weak balance of trade data released recently also perpetuated the downgrade in production forecast for the economy. Let’s take a look at Japan’s trade situation.

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