Japan Credit Rating Downgraded By Fitch? Thank You, Captain Obvious

In an acknowledgement of the glaringly obvious, Fitch downgraded Japan’s credit rating by a notch on Monday, citing Japan’s ballooning pubic debt.

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My only question is this: What took them so long?

Fitch now rates Japanese debt as an A, which is five full notches below the top AAA rating…and just a few notches short of actual non-investment-grade junk status.

The straw that seems to have broken the camel’s back for Fitch was the delay by Japan in raising its consumption tax from 8% to 10%.

Seriously? That’s where they decide to draw the line?

Japan was a solid credit before, but now, because they delayed raising taxes by two percent, their commitment to fiscal discipline is being questioned?

You might detect a little sarcasm here, but Japan’s fiscal position is no laughing matter. Japan has dug itself into a hole from which it cannot realistically hope to dig itself out. Japan won’t “default” on its debts, as they are denominated in yen and Japan can essentially print the yen it needs to pay its existing creditors. That is pretty much what is happening today, as the Bank of Japan is the buyer of substantially all new bonds being issued by the Japanese treasury.

But while outright “default” may not happen, something every bit as destructive will. Eventually, the market will turn on the yen, and the controlled decline of recent years will turn into a collapse. Sure, Japan will pay its debts. But it will be in currency so depreciated it won’t really matter.

Let’s take a good, hard look at Japan. By Fitch estimates, Japan’s sovereign debts will rise to fully 244% of GDP by year end. Whether they raise consumption tax to 10% or 110%, it’s hard to see much materially changing on the indebtedness front. Not even Greece—yes, GREECE—has a debt burden that high. At last count, Greek sovereign debt stood at about 177% of GDP.

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Disclosures: None.

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