For Japan, at least, there was a silver lining to Egypt’s gargantuan cloud, which swept the media fall-out from last week’s S&P’s downgrade of Japan’s debt rating right off the front pages.
Another glittering lining emerges from the downgrade itself, which has been widely seen as giving Japan’s ever-worried prime minister, Naoto Kan, a stronger hand to push through some tough tax reforms.
But enough is enough, and questions about what the other big rating agencies will do with (or rather, to) Japan’s sovereign ratings are clearly weighing on Kan and his cabinet.
They might draw some cheer from Moody’s, which on Tuesday came out with an unexpectedly benign view of prospects for corporate Japan, in its annual review of Japanese companies.
In its 2011 Japanese corporate credit outlook, Moody’s predicts that “stabilisation” in ratings trends for Japanese corporates will continue this year, although it warns that the pace of improvements is uncertain.
Here’s Moody’s reasoning:
“Export growth — although moderating — is the key supporting factor for the trend, as we expect the Japanese economy to remain sluggish,” said a Moody’s spokesman. However, she added, expectations of continued monetary easing will further support the stabilisation trend. And banks, Moody’s predicts, “will stay supportive of corporates”.
Indeed, recent official data would seem to reinforce this view — not least, Japan’s preliminary December industrial production figures issued on Monday, which saw the headline number rise 3.1 per cent — well up on the expected 2.8 per cent — and the first rise in five months.
As Mizuho analyst and Japan commentator Jonathan Allum noted, a similar message emerges from the January number of the Nomura/JMMA Manufacturing PMI which rose from 48.3 to 51.4, the first reading above the 50 “boom/bust” line since last August. He continues:
If the METI forecasts are to believed – and they have not proved to be totally unreliable – industrial production should increase 5.7% MoM in January (a month ago the prediction was for a 3.7% rise) before slipping back 1.2% in February.
Overall, says Moody’s, the pace of improvement in the corporate ratings trend will depend on the extent to which Japanese companies can successfully undertake “further business restructurings and cost cuts” for ” better operating performances”.
On other challenges, it notes, yen strength will weigh on the competitiveness of corporate Japan, while other risks to the stabilising trend could arise from M&A, increases in capital expenditure as corporates expand overseas, and higher returns to shareholders.
In addition, the percentage of corporate ratings with negative implication remains high, it notes, standing at 18 per cent at end-2010, and compared to pre-crisis low single-digit levels.
This, explains Moody’s, “reflects concerns over the pace at which these companies can restore their weakened credit profiles in the face of sluggish domestic markets and anticipated moderating export growth”. On the upside, though:
… the proportion of ratings with stable outlooks rose consistently on a quarterly basis, and had returned close to pre-crisis levels as of end-2010…this… trend primarily reflected improved financial profiles as a result of strong demand, mainly from the emerging markets, such as China; major cost cuts; and, for some, successful equity raisings. Profit margins have also recovered and leverage has fallen.
Even so, on Japan’s stock markets, recent sharp movements suggest the earnings season is taking its toll on some companies. As Pelham Smithers of PSA noted, Monday’s reaction to relatively poor figures from online retailer Start Today was “a warning, if ever it was needed, that companies really had to step up to the plate this quarter when it came to producing not just good figures but forecasts as well”.
As for sovereign rating downgrades — judging by the course of both Japan’s stock and bond markets, it seems that in terms of investor sentiment, the S&P downgrade barely caused a ripple. As Allum noted:
The predictors of Armageddon (Japanese fiscal branch) will be chuckling today [Jan 28] as S&P has downgraded Japan’s debt rating to AA-. They may be a tad disappointed at the reaction of the JGB market – although the cash market had closed in Tokyo by the time S&P had dropped their “bombshell”, the futures market, which was open, registered a decline of less than 0.2%, leaving the price higher than yesterday’s level. We have, of course, been here before. A sovereign downgrade [by Moody's] in 2002 (back in the days when people actually believed rating agencies) had no discernible effect on the JGB market but did cause a temporary rift in Japan-Botswana relations after the following outburst in the Diet from the then METI minister Takeo Hiranuma [which was factually incorrect on the Aids statistics and for which he later apologised] :
“The rating on Japanese government bonds is now lower than government bonds of Botswana. About half the people of Botswana are AIDS patients, and it’s outrageous that Japan is rated lower than such a country”
While the S&P downgrade was a knock to Japan’s national pride, the FT notes, “at least the world’s third largest economy can take comfort in the fact that it is [now] … seen as more creditworthy than Botswana”.
Err, quite…
Related Links:
Japan downgrade: The (umpteenth) denouement – FT Alphaville
S&P downgrades Japan - Lex
Japan downgraded: Big deal – TheSource
Structural worries intensify yen’s plight – FT