The government has to stand alone in presenting and implementing a convincing economic model. A decade steered by a messed-up public finance system with an alarming trajectory of debt only worsens the prospects for its debt-servicing capacity in the future.
The agencies’ downgrading judgments are also based on an analysis of the government’s failure to carry out the reforms promised by Prime Minister Junichiro Koizumi. Without them, the economy won’t be able to climb out of its deflationary spiral.
The slogan of “no gain without pain,” which Koizumi trumpeted upon assuming office last April, has faded, as shown by the steady slide in his popularity.
This lack of political will cannot be rewarded by the credit-rating agencies. Increasing bad debts in the banking sector and the disappointment rightly expressed by the agencies on the FSA’s inspections reinforce the point that urgency in reforms and restructuring aren’t the priorities of this administration.
The fiscal deficit, which is forecast to become 140 percent of Japan’s GDP in March 2003, is already the highest among the Group of Eight countries. Experts forecast that the deficit will keep on galloping even beyond 200 percent. The government has to reduce spending on several unremunerative projects and enforce fiscal discipline.
The complacency of the political class is creating an atmosphere of uncertainty that discourages people from spending.
Worse, the labor force is shrinking by 0.6 percent a year as the population enters a rapid aging phase that will further reduce consumption, impact public finances and shrink the economy.
False scenarios of the economy “bottoming out” have been presented many times to this country since the 1990s.
A few years ago, while doing credit analysis at a foreign bank here, many of our Japanese clients (including Fortune 500 companies) boasted of their huge size, large asset levels and turnover. They found it hard to digest that improvements in cash flows, profit margins, and operating efficiency were essential for them to get better credit scores from us.
Unhesitatingly, I recommended limit cuts on these companies and forecasted restructuring for them in the near future, which subsequently happened. The same logic applies to Japan. Its “strong points” are not very relevant in this situation, and at this stage nobody has said yet that it is going to default. The agencies have duly cited these strengths in their reports.
To earn higher credit ratings, the government has to improve not only its financial strength, but also its future debt-servicing prospects.
With the pressure groups of Japanese voters, domestic industry and even foreign governments having been ineffective for their own different reasons, it is left to the credit rating agencies to enforce fiscal discipline and reforms on the Japanese government.
Syed Ehsan, a former credit analyst, is a consultant at Technics in Management Transfer Inc., in Tokyo.