S&P warns rate hike could hit Japan’s sovereign debt rating

A FUTURE Bank of Japan (BOJ) interest-rate hike could affect the country’s sovereign debt rating if firms struggle to absorb rising funding costs, a senior executive at S&P Global Ratings said on Thursday (Feb 9).

Higher borrowing costs could also lead to a downturn in long-term economic growth, the banking company added.

Japanese bond yields have crept up on market expectations that the BOJ will phase out its yield-control policy and start raising interest rates under a new governor in April, when incumbent Haruhiko Kuroda steps down.

While more hikes in long-term interest rates could further increase Japan’s large debt burden, such factors were already taken into account in the current “A+” sovereign debt rating assigned by S&P, said Kim Eng Tan, senior director of the company’s Asia-Pacific sovereign ratings team.

The bigger concern was whether Japanese firms, accustomed to many years of ultra-low interest rates, could absorb higher funding costs that come from tighter monetary policy, he said in an interview.

He added that S&P expected the BOJ to tighten policy only gradually, with the near-term impact on the economy likely to be limited.

But the longer-term effect on Japanese businesses and the broader economy was of concern, as “we’re now at a stage where interest rates seem to be rising, and there’s quite a bit of uncertainty about how far it will go before it stabilises again”.

He said that even an interest-rate increase of 1 to 2 percentage points would have a big impact on Japanese companies, particularly those in the service-sector with low profits or high debt.

“They’ve been used to a very low interest-rate environment for quite a while. So it is really the impact on the economy that could potentially have an impact on our ratings,” he said.

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S&P currently assigns “A+“ long-term and “A-1“ short-term sovereign debt ratings on Japan. The outlook on the long-term rating is stable. REUTERS