Japan furious at credit downgrade

Just as the Japanese government was reassuring the world that its economy was picking up, Moody's Investors Service today cut the country's credit rating by two notches.

The move marks the second credit rating cut in six months and ranks Japan, the world's second biggest economy and largest creditor nation, in the same league as Cyprus, Greece and Latvia.

The downgrade provoked a furious response from Haruhiko Kuroda, the finance ministry's vice minister for international affairs, who called the downgrade "completely inappropriate" and demanded an explanation.

"Of course we want them to reconsider, and we will be requesting that they do just that," he added.

The cuts follow similar downgrades last month by Standard & Poor, which blamed the lack of progress in government reforms to tackle public debt.

Moody's slashed its rating for yen-denominated domestic securities issued or guaranteed by the Japanese government by two notches, to A2 from Aa3. Moody's last cut the rating in December.

The agency said the level of government indebtedness "will approach levels unprecedented in the postwar era in the developed world, and that as such Japan will be entering 'uncharted territory'."

By the end of March, Japan's public debt stood around 675,000 billion yen (£3,800bn) or about 135% of gross domestic product, higher than nearly any other industrialised country.

The prime minister, Junichiro Koizumi, has promised reforms to clean up massive bad debts at Japanese banks, rein in public spending and turn over money-losing public businesses to the private sector. He has also pledged to cap new government debt issues at 30,000 billion yen.

But many analysts say Japan's decade-long economic slump is far from improving, and warn that lawmakers are failing to grasp the magnitude of the crisis.

The problems are only made worse by Japan's ageing population, which will force the government to spend more on health and retirement, and by bad loans overhanging private banks.

Moody's predicted that domestic debt would worsen over the next few years but that several features would prevent Japan from plunging into a medium-term crisis. Among them were Japan's high household savings rate and the small scale of the government's exposure to foreign creditors.

Japan's benchmark 225-issue Nikkei stock average fell 6.33 points, or 0.05 percent, to 11,763.70, erasing morning gains on news of the Moody's downgrade.