The Wall Street Journal reported on Monday that bond rating service, Fitch Ratings, downgraded Japan’s credit rating by a notch from A-plus to A. According to Fitch, the downgrade was made due Japan’s deteriorating financial condition. This is highlighted by the fact that Japan’s debt to GDP ratio is now over 200% and projected to grow next year to over 240%. This would be the highest debt to GDP ratio for any foreign bonds rated by Fitch.
Japan’s sovereign finances are an example of the race to the bottom. Countries throughout the world have used public spending and low interest rate policies in an effort to stimulate growth. However, Japan has been in a 30 year period of stagnation, the poster child for the failure of these governmental interventions. It is likely that these interventions they inhibited real economic growth and recovery, leading not only to long-term problems in Japan, but also in other economies worldwide.
Under normal times Japan’s economic situation would cause substantial turmoil in financial markets. But these are not normal times. While Japan’s economic policies have failed and resulted in its significant sovereign debt, other countries are also running up debt to unprecedented levels. As a result the bond markets have not decided who to punish for imprudent economic policies. This equivocation has given countries like Japan some breathing space. However, economic markets always revert to the mean. Ultimately countries with bad finances will be punished by the markets. When this occurs it will likely come quickly and with little warning causing significant economic turmoil worldwide, a repeat of the economic turmoil that occurred in 2008.