Within the same month as another world super economy was downgraded in their debt rating, Japan which is the world’s third largest economy has likewise lost ground. Moody’s has cut Japan from its previous Aa3 to Aa2 because of the levels of debt and borrowing.
In fact, although they are ranked number three in world economies, their debt level is the highest amongst all developed countries and the global debt crisis of 2009 was just exacerbated this year’s widespread destruction from the earthquake and subsequent tsunami.
In a statement released by Moody’s, the downgrade was prompted because of huge budget deficits and the accumulation of government debt, all since the onset of the global recession in 2009. Matters were simply made worse by tragic events in March when the northeast coast was levelled by the quake and tsunami.
Even so, there is no worry at the current time that Japan’s economy will recover as they are still going strong, albeit at a reduced pace. Their economy is indeed in a depression but the forecast is for their business sector to gain strength even though their deficit will continue to rise.
A major concern is that much of the area will need to be rebuilt due to widespread destruction. This may prompt another round of borrowing which will add to the current level of public debt. Although the economy is not shrinking as significantly as many analysts had forecast, it is still shrinking nonetheless.
In the final analysis, Moody’s considered the fact that consumers and subsequently companies are spending less. This means less tax revenue for Japan’s government which may further impact debt recovery plans. Even so, some analysts believe Japan has the ability to rebound sooner rather than later, but Moody’s opted on the conservative side of that assessment and downgraded Japan’s debt rating accordingly.