Ratings agency Standard & Poor’s has downgraded the sovereign credit rating of Japan, the third-biggest economy in the world, to AA- from AA.
S&P warned that the Japanese government’s high debt burden would probably continue to climb even higher and peak in the middle of the next decade.
“In the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation program is implemented beforehand,” S&P stated.
Japan, already burdened by deflation, a tepid economic recovery and a rapidly aging population, is also facing skyrocketing pension and social security costs.
“The nation’s total social security related expenses now make up 31 percent of the government’s fiscal 2011 budget, and this ratio will rise absent reforms beyond those enacted in 2004,” S&P added.
Japan is expected to grow its GDP by only about 1 percent in the near-term, S&P noted.
The “government lacks a coherent strategy to address these negative aspects of the country’s debt dynamics,” S&P warned. “We think there is a low chance that the government’s announced 2011 reviews of the nation’s social security and consumption tax systems will lead to material improvements to the inter-temporal solvency of the state.”