Moody's sees risk Japan to hit fiscal 'tipping point'

Japan may “at some point” reach a fiscal “tipping point” if investors lose confidence in the soundness of government finances and demand a risk premium on the nation’s bonds, Moody’s Investors Service said.

The March 11 earthquake “may have shifted such a potential tipping point a bit forward, unless Japan’s political parties are galvanised by the crisis to also address the country’s long-term fiscal challenges,” Tom Byrne, a senior vice president with Moody’s, said.

Japan’s economy, the world’s third biggest, will be able to absorb the shock of the earthquake and tsunami that have devastated northeastern areas and a fiscal crisis is not imminent, Byrne said. At the same time, the costs associated with the disaster will likely halt any progress in reducing “large” budget deficits, he said.

Estimates of the economic damage from the natural disaster will “likely increase in the weeks and months ahead,” Byrne said. “Already ripple effects beyond the devastated zones are being seen in curtailed electricity supplies and suspended production in some automobile, and petroleum refining plants.”

Government debt is set to reach 210 per cent of GDP in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development (OECD), compared with an estimated 101 per cent for the US Japan’s debt will probably swell to ¥997.7 trillion ($12 trillion) in the year starting April 1.

Standard & Poor’s cut its sovereign rating for Japan in January to the fourth-highest investment grade, citing the lack of a “coherent strategy” for reining in borrowing. Moody’s lowered its outlook on Japan’s Aa2 grade, the third highest, last month, also flagging the risk of political gridlock, with economic and fiscal policies in danger of failing to contain “the inexorable rise in debt.”