Like so much in Japan these days, the economy is generating bad news and some good news. But circumstances — and some international views — appear to be conspiring against it.
On the day that Moody’s said it had put Japan’s credit rating on review for a possible downgrade, the country’s April industrial production data sounded a tiny note of optimism. As the FT reports:
Japanese industrial production showed signs of bottoming out in April after a record fall in March due to the earthquake and tsunami which disrupted global supply chains. Output rose a seasonally-adjusted 1 per cent in April, from the record decline in March, the government said on Tuesday.
Companies surveyed by the government expect production to rise 8 per cent in May and another 7.7 per cent in June, suggesting a possible rapid recovery in production. Barclays Capital said the government forecasts suggested that output could return to pre-quake levels by June, helped largely by the transport sector.
Even with production recovering, economists forecast that the Japanese economy will probably contract for a third consecutive quarter in the three months through to the end of June, as supply-chain disruptions persist. The economy may also be impacted by power outages during the summer due to the Tokyo Electric nuclear crisis.
Any good cheer, however, was lost in a torrent of Moody-gloom.
On Tuesday, the rating agency also unleashed a near-record number of Japan-related rating actions, on everything from regional governments to big corporations, tiny bank affiliates and government-sponsored enterprises.
Here, just to give you a flavour, is a list of most of the actions:
- More than 70 rated Japanese banks and affiliates.
- 15 companies that issue bonds, including utilities and Toyota.
- 12 regional and local governments.
- Five Aa3-rated corporates.
- Five bank-affiliated finance companies.
- Seven so-called “non-zaito” government-related issuers.
- 13 government-related issuers.
So, was it “get Japan day”?
Speaking in Tokyo, Tom Byrne, lead Japan analyst for Moody’s, explained that the flurry of Japan-related actions was a “special case”, but an entirely logical one following the initial move to place Japan’s sovereign rating on review for a possible downgrade.
Unlike Moody’s move in February to change its outlook on Japan’s sovereign Aa2 rating to negative from stable, a review for possible downgrade implies a far greater probability that a downgrade will take place.
The Japanese government’s sovereign credit rating supports the banks, and if the government is under rating pressure, so are the banks and local governments, Byrne noted. And because of the large risk socialisation factor in Japan, if banks — which support corporations and a range of affiliates — are under rating pressure, so are the corporations. And so on…
The agency will most likely decide on whether to cut Japan’s rating within the next three months, he added. What Moody’s is looking to is the forthcoming decision — if any — from Japan’s government about a comprehensive tax reform programme.
Moody’s is also looking for further information on the overall fiscal and economic impact of the March 11 earthquake and tsunami disasters. The fate of Tepco, Japan’s biggest utility and operator of the stricken Fukushima Daiichi nuclear power plant, will also play a key role, amid much speculation that its vast contingent liabilities could be moved onto the government’s balance sheet — or at least, require a bail-out from the government and banks.
Either way, ratings agencies are clearly in for a busy time in Japan — and the Japanese government is looking at an increasingly vast damage-control job, not just in the devastated Tohoku region.
Related links:
Japan – short sellers still waiting – FTfm
In-depth report: Japan’s March 11 disasters - FT.com
S&P has another go at Japan – FT Alphaville