Japan’s credit ratings may hinge on BOJ policy changes, S&P says

BANK of Japan (BOJ) policy may become the most crucial element in deciding the nation’s creditworthiness, S&P Global Ratings said, suggesting the central bank’s action has the potential to trigger its first sovereign credit rating change in years.

“The risks of policy changes or no policy changes are both quite high right now,” Kim Eng Tan, primary Japan credit analyst, said in an interview. “Therefore, this is probably the most important factor that could determine the rating triggers.”

Speculation has been building that the BOJ may start to withdraw its decade-old monetary stimulus next year as the yen’s fall driven by its policy helps accelerate inflation. Debate has focused on whether the central bank should hold firm to fully eliminate the threat of deflation returning, or start to tighten the spigot to pre-empt higher price growth.

Under governor Haruhiko Kuroda, whose term ends in March, the BOJ has been keeping a lid on government borrowing costs through its yield-curve control policy, which has been tested by traders this year only for the central bank to increase bond purchases to defend it. At more than 250 per cent of annual economic output, Japan’s public debt is the highest among advanced economies.

While Tan refrained from discussing what the BOJ should do, he noted that the risk of price declines is “more serious” for Japan’s sovereign ratings than the danger of price increases. “As for whether the risk of deflation or inflation is higher, it is dependent directly on what the BOJ does,” he said.

S&P last changed Japan’s credit rating in 2015, by downgrading it to A+ in a show of doubt over then-Prime Minister Shinzo Abe’s growth revival plans. The company earlier this year kept the scoring unchanged while calling the nation’s credit outlook “stable”.

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The yen’s depreciation is “positive for the revenue of the government” partly because it helps lift corporate earnings and hence tax payments, Tan said.

“One key question is the risk of a sudden rebound in the yen” as a result of changes in expectations or weakness in other developed economies, he said. “That could also bring a new set of risks.” BLOOMBERG