TOKYO (MNI) – Standard & Poor’s said it has slashed the outlook for
foreign currency- and yen-denominated sovereign debt of Japan to
“negative” from “stable,” citing the fallout from the March 11
earthquake disaster.

The ratings agency, meantime, affirmed its AA- rating for Japanese
long-term debt and A-1+ rating for short-term debt.

The yen weakened versus the dollar following the rating news,
reaching as low as Y81.77 from an intra-session high of Y81.24, while
yields on 10-year JGBs finished the morning up 0.5 basis points at
1.220%.

The rating action came after the S&P lowered on Jan. 27 the
sovereign debt rating to the current level, the fourth-highest level,
citing the ruling Democratic Party of Japan’s lack of “coherent
strategy” in dealing with a debt approaching 200% of gross domestic
product.

“S&P expects the reconstruction cost will reach from Y20 to Y50
trillion,” the rating agency said in a statement on Wednesday.

“Unless such measures as tax hike are implemented, outstanding
government debt would reach 145% of gross domestic products in fiscal
2013, against S&P’s earlier forecast for the ratio to reach 137%,” it
added.

The government of Japanese Prime Minister Naoto Kan drafted last
Friday the first supplementary budget for fiscal 2011 totalling Y4.015
trillion, mainly to finance the reconstruction of the northeastern areas
wrecked by the powerful earthquake and tsunami.

The government has said the massive damage inflicted on Japan’s
northeastern Pacific coast is estimated at up to Y25 trillion ($309
billion), making it the costliest natural disaster in the country’s
post-war history.

The estimated damage would exceed the toll of around Y9.6 trillion
from the Great Hanshin Earthquake, which hit the western Japanese port
city of Kobe on Jan. 17, 1995.

In February, Moody’s Investors Service lowered the outlook on
Japan’s Aa2 sovereign debt rating to negative from stable, citing the
slow policy response by the government to the surging public sector
budget deficit.

By the end of March 2012, the level of outstanding Japanese
government bonds will total Y668 trillion, 138% of projected gross
domestic product, while its outstanding long-term debt, including JGBs
and municipal bonds, is expected to total Y891 trillion, 184% of
projected GDP, according to an estimate by the Ministry of Finance.

As a result, Japan will remain the most heavily indebted
industrialized nation, dwarfing gross public debt held by Greece. The
troubled African nation of Zimbabwe is the only country in the world
with a higher debt-to-GDP ratio than Japan.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4835 **

[TOPICS: M$J$$$,M$A$$$,MGJ$$$]