Credit downgrade a wake-up call: Japanese industry leaders

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Standard & Poor's downgrade of Japan's credit rating is a wake-up call for the Asian country to deal with its ballooning debt problem, Japanese industry leaders said at Davos.

"In a way it's good because it really forces people to understand because there is still resistance within Japan towards raising taxes, which you obviously need," Daisuke Iwase, who co-founded Lifenet Insurance, told AFP.

Standard & Poor's on Thursday cut Japan's credit rating for the first time since 2002, dropping its long-term sovereign debt to "AA minus" from "AA".

The agency accused the government of lacking a "coherent strategy" to ease what, at 200 percent, is the highest debt proportional to GDP of any industrialised nation.

To date, the Japanese government has been able to fund its growing fiscal gap by raising money in the domestic market, with around 95 percent of the country's huge debt held domestically via banks and pension schemes.

Iwase, who spoke to AFP on the sidelines of the World Economic Forum, said the fact that most of the debt was funded by domestic savings had engendered a sort of optimism in Japan regarding the issue, but that he was sceptical.

He warned that any external triggers such as a credit downgrade could nevertheless lead to a sell-off of Japanese bonds, thereby sparking a crisis.

"There are people who think they can avoid reducing spending. It's absurd.

"In a way, not in a selfish way, but in the medium to long run, if this is the only way Japanese politicians can understand the change and the only way that general public can understand change, then this is good," he added.

Miyahara Koji, chairman of Japanese shipping giant Nippon Yusen Kabushiki Kaisha, said: "The Japanese people need a shock."

The businessman said the government should increase the sales tax immediately.

"We need to restructure the budget, expenditure," he said, noting that one of the root problems is a structural one linked to the ageing population.

"It's very difficult because you can't change the structure of the population. The very bad thing is that elderly people are very rich, but they don't want to consume," he added.

Standard & Poor's said that it expected the country's groaning fiscal deficits to stay high in coming years.

"The downgrade reflects our appraisal that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s," S&P said.

It was the first downgrade of a G7 member since Italy in October 2006, and underlined mounting problems with national debts since the 2008 financial crisis. Four eurozone members including Spain suffered downgrades last year.

The cut came just two days before Japanese Prime Minister Naoto Kan is to address the Davos forum.

On Monday, Kan marked the opening of a 150-day parliament session by saying that the nation faces "inevitable" tax increases in the future as a rapidly ageing society pushes social security costs and public debt higher.

The only positive from the downgrade was that it led to a drop in the yen.

The Japanese currency tumbled following the announcement, with the dollar gaining by more than a yen to 83.20 yen from around 82.12 in earlier trade, before recovering to around 82.76 to the dollar.

Tadashi Matsushita, All Nippon Airways spokesman said the Japanese currency "doesn't reflect the real economy."

"In the long run, the yen should be lower," he said, arguing that country's deficit and rapidly ageing population should be reflected in a weaker currency that would, in turn, aid exports.

Ohkawa Shigenori, executive vice-president of Takeda Pharmaceuticals International Inc, also noted that the company had been suffering from the strength of the yen against the US dollar.

Nevertheless, he added: "The government budget problem is a significant and urgent issue and has to be dealt with."

© 2011 AFP

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