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'Nuclear option' sours Japan's rating
By William Pesek |
January 11, 2013, Friday
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Taro Aso, 72, sure is a busy man. While most Japanese of his vintage are happily ensconced in retirement, Aso has three new jobs: deputy prime minister, finance minister and minister for financial services.
This trifecta of responsibilities means Aso has been deputized to end deflation and weaken the yen once and for all. As he endeavors to do what no one has done before, Aso also will conduct an experiment of great interest to policy makers and investors: testing whether credit ratings matter.
Aso clearly has the complete trust of Prime Minister Shinzo Abe, who was elected last month.
What Abe and Aso share is a love of the idea of Japanese primacy in Asia and the kind of Keynesianism on steroids that left the country with the biggest ratio of debt-to-gross-domestic-product of any developed nation. What they don't talk about much is how their plans to reopen the money spigot may run afoul of Moody's Investors Service, Standard & Poor's and Fitch Ratings.
The Liberal Democratic Party ruled Japan for a half-century before losing power in 2009. To show how much it changed after three years in the minority, Abe assembled a "crisis breakthrough Cabinet" to end Japan's malaise. Yet the LDP is better at devising reformist mantras than implementing them.
Magic formula
Now Abe and Aso say the people should trust the new-and-improved LDP. They insist their two-point plan to create an aggressive inflation target and to demand that the central bank buy unlimited blocks of government bonds is a magic formula for renewed prosperity.
The motivation is clear enough. Japan has been trying to ward off deflation for a decade and a half. Why not just throw all the money at the problem, what economists call the "nuclear option"? Wouldn't the end justify the desperate means? Perhaps, but there's a party to this enterprise that officials in Tokyo aren't considering: the arbiters of perceptions that affect Japan's fiscal health.
There's a school of thought that the odd sovereign downgrade doesn't matter. Just ask Timothy Geithner, the US Treasury secretary on whose watch the US lost its AAA rating. All S&P did was unleash a bull market in US debt. Investors can't get enough of the stuff, driving yields to historic lows and shaming S&P's number crunchers.
It's an open question whether a post-downgrade Japan would maintain its sub-1 percent bond yields and add to the raters' humiliation. In 2002, Japan practically declared war on credit-rating companies for downgrading it below Botswana. Its investigation of their evaluation methods made global headlines.
Japan's debt market is hardly conventional; more than 90 percent of it is held domestically, so ratings don't matter that much. Yet Japan doesn't print the reserve currency, as the US does. Nor are its demographics as virtuous as America's. Japan is the fastest-aging and least-fertile member of the Organization for Economic Cooperation and Development.
Abe and Aso are about to test the tolerance for downgrades. Credit analysts won't sit by as they push Japan's debt-to-GDP ratio toward 250 percent and beyond when Greece, at 171 percent, is below investment grade. They also won't like the absence of new thinking coming from the LDP. A fresh wave of stimulus measures must be accompanied by strategies to increase their potency.
Multiplier effect
Strong accountability is needed to avoid the white-elephant public-works projects of the past. If there is a new burst of infrastructure spending, it should be concentrated in the earthquake-devastated Tohoku region. Also, make it unattractive, via new taxes, for banks to hoard government bonds. Give them incentives to lend, thereby promoting monetary policy's multiplier effect. Otherwise, Japan will just throw away another trillion dollars, or more.
Aso is a former prime minister and LDP stalwart, and nothing he has said or done suggests he's approaching his new job with a fresh lens or toolkit. The same goes for Abe, whose 2006-2007 tenure as premier was anything but distinguished.
Abe is no more visionary in foreign policy. He wants to revisit an apology Japan made in the 1990s for its World War II enslavement of women, mainly Korean, in army brothels. He wants to rewrite Japan's pacifist postwar constitution to confront an ascendant China, to which S&P assigns the same AA- rating it does to Japan. What's the point of driving down the yen if two of your biggest customers boycott your goods?
The challenge is for a party known more for cronyism and gridlock than enlightened policies to reinvent a system it created. Relying on stimulus alone will hurt Japan's creditworthiness given the context of its fiscal morass.
William Pesek is a Bloomberg View columnist. The opinions expressed are his own.
This trifecta of responsibilities means Aso has been deputized to end deflation and weaken the yen once and for all. As he endeavors to do what no one has done before, Aso also will conduct an experiment of great interest to policy makers and investors: testing whether credit ratings matter.
Aso clearly has the complete trust of Prime Minister Shinzo Abe, who was elected last month.
What Abe and Aso share is a love of the idea of Japanese primacy in Asia and the kind of Keynesianism on steroids that left the country with the biggest ratio of debt-to-gross-domestic-product of any developed nation. What they don't talk about much is how their plans to reopen the money spigot may run afoul of Moody's Investors Service, Standard & Poor's and Fitch Ratings.
The Liberal Democratic Party ruled Japan for a half-century before losing power in 2009. To show how much it changed after three years in the minority, Abe assembled a "crisis breakthrough Cabinet" to end Japan's malaise. Yet the LDP is better at devising reformist mantras than implementing them.
Magic formula
Now Abe and Aso say the people should trust the new-and-improved LDP. They insist their two-point plan to create an aggressive inflation target and to demand that the central bank buy unlimited blocks of government bonds is a magic formula for renewed prosperity.
The motivation is clear enough. Japan has been trying to ward off deflation for a decade and a half. Why not just throw all the money at the problem, what economists call the "nuclear option"? Wouldn't the end justify the desperate means? Perhaps, but there's a party to this enterprise that officials in Tokyo aren't considering: the arbiters of perceptions that affect Japan's fiscal health.
There's a school of thought that the odd sovereign downgrade doesn't matter. Just ask Timothy Geithner, the US Treasury secretary on whose watch the US lost its AAA rating. All S&P did was unleash a bull market in US debt. Investors can't get enough of the stuff, driving yields to historic lows and shaming S&P's number crunchers.
It's an open question whether a post-downgrade Japan would maintain its sub-1 percent bond yields and add to the raters' humiliation. In 2002, Japan practically declared war on credit-rating companies for downgrading it below Botswana. Its investigation of their evaluation methods made global headlines.
Japan's debt market is hardly conventional; more than 90 percent of it is held domestically, so ratings don't matter that much. Yet Japan doesn't print the reserve currency, as the US does. Nor are its demographics as virtuous as America's. Japan is the fastest-aging and least-fertile member of the Organization for Economic Cooperation and Development.
Abe and Aso are about to test the tolerance for downgrades. Credit analysts won't sit by as they push Japan's debt-to-GDP ratio toward 250 percent and beyond when Greece, at 171 percent, is below investment grade. They also won't like the absence of new thinking coming from the LDP. A fresh wave of stimulus measures must be accompanied by strategies to increase their potency.
Multiplier effect
Strong accountability is needed to avoid the white-elephant public-works projects of the past. If there is a new burst of infrastructure spending, it should be concentrated in the earthquake-devastated Tohoku region. Also, make it unattractive, via new taxes, for banks to hoard government bonds. Give them incentives to lend, thereby promoting monetary policy's multiplier effect. Otherwise, Japan will just throw away another trillion dollars, or more.
Aso is a former prime minister and LDP stalwart, and nothing he has said or done suggests he's approaching his new job with a fresh lens or toolkit. The same goes for Abe, whose 2006-2007 tenure as premier was anything but distinguished.
Abe is no more visionary in foreign policy. He wants to revisit an apology Japan made in the 1990s for its World War II enslavement of women, mainly Korean, in army brothels. He wants to rewrite Japan's pacifist postwar constitution to confront an ascendant China, to which S&P assigns the same AA- rating it does to Japan. What's the point of driving down the yen if two of your biggest customers boycott your goods?
The challenge is for a party known more for cronyism and gridlock than enlightened policies to reinvent a system it created. Relying on stimulus alone will hurt Japan's creditworthiness given the context of its fiscal morass.
William Pesek is a Bloomberg View columnist. The opinions expressed are his own.
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