Japan’s long-term foreign currency rating has been downgraded on Tuesday by Fitch Ratings agency to A plus from AA minus with a negative outlook.
“The downgrades and Negative Outlooks reflect growing risks for Japan’s sovereign credit profile as a result of high and rising public debt ratios,” said Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch. “The country’s fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk.”
Finance Minister Jun Azumi said the government will make efforts toward implementing social welfare and tax reforms after speaking to reporters following the news of the downgrade.
The yen fell against the dollar after the announcement, with USDJPY surging to a European session high of 79.83, up 0.5 percent from the session open level of 79.45. EURJPY rose to 101.92, moving further from a three-month low.
However some analysts believe the yen will rebound and the selling will not be sustained.
Ian Stannard, Head of European FX Strategy at Morgan Stanley in London said:
“The initial market reaction has been to weaken the yen but I don’t think that is sustainable. It is likely that the yen will remain strong.
“Foreign investor participation in the JGB market is low, so it is unlikely to have much impact on the FX market from a flow perspective. Also, Japanese investors are very sensitive to relative yields.
“If we see any yield differential moves we could see repatriation flows back into Japan. It will make it more attractive for Japanese investors to stay at home and not invest overseas.
“In such a low yield environment, it doesn’t take much of a move to prompt a change in investment decisions.”