TOKYO: Ratings agency Standard & Poor’s on Wednesday cut its outlook on Japan’s sovereign debt following last month’s quake-tsunami disaster and warned that reconstruction costs could pass $600 billion.
It said, however, that the March 11 disaster, which obliterated whole towns on the northeast coast, left 26,000 people dead or missing and triggered a nuclear crisis, would not hurt Japan’s medium-term growth potential.
The credit ratings agency said the cost of rebuilding could range from 20 trillion yen to 50 trillion yen ($245 billion to $612 billion).
It said 30 trillion yen was its central forecast, if there are no measures to boost revenue, such as tax increases. The figure is somewhat higher than government estimates of as much as 25 trillion yen, not including the nuclear accident.
“If there are no revenue-enhancing measures such as tax increases, we expect the central and local governments to bear most of this cost,” the ratings agency said.
“Although we do not expect the disasters to materially hurt the country’s medium-term growth potential,” Standard & Poor’s said it forecast that the calamity would increase Japan’s fiscal deficit by a cumulative 3.7 percent of GDP through 2013.
The rating’s agency cut the outlook on its Japan debt rating to negative from stable.
“The negative outlook signals that a downgrade is possible if Japan’s public finances weaken further over the next two years in the absence of fiscal consolidation to offset them.
“We believe that uncertainty over the country’s fiscal and economic outlook will lessen over the next six to 24 months.”
The ratings agency affirmed its long-term sovereign credit rating at “AA-.”
S&P’s announcement comes as Japan struggles to whittle down a public debt mountain around 200 percent of its $5 trillion economy, the highest debt level among industrialized nations.
Finance Minister Yoshihiko Noda did not comment on the S&P outlook downgrade but said the country had to balance reconstruction needs with fiscal reform.
“We managed to secure financial resources [for a four trillion yen extra budget] without issuing new government bonds,” he said.
“We will keep this stance in principle and make efforts to retain domestic and international confidence in our economy and finances.”
The ratings agency said: “If the government’s debt trajectory remains on its current course or begins to erode the nation’s external position, the long- and short-term ratings could be lowered.”
Standard & Poor’s warned that its projections were “uncertain” because of ongoing developments at the Fukushima nuclear power plant, where workers are battling to cool reactors and spent fuel rod pools to prevent a meltdown.
“Much will depend on Japan’s political leadership and its ability to forge a political consensus on how to offset fiscal measures in the future,” it said.
“The extent of environmental contamination in northeastern Japan remains unknown.”
The nuclear disaster, the world’s worst since Chernobyl 25 years ago, has caused electricity shortages while the quake and tsunami damaged and destroyed production facilities and infrastructure, disrupting supply chains.
“Although we expect no lasting damage to Japan’s supply chains, some manufacturers could decide to move a greater share of production offshore,” the ratings agency said.
“Combined with the headwinds of intermittent deflation and a fast-ageing population, Japan will be challenged to raise its real GDP growth potential much above one percent annually over the medium term, in our view.”
Retail sales recorded their steepest drop in 13 years in March, the government said Wednesday as the disasters dampened consumer sentiment.
Japan has been fighting a long and losing battle against deflation, which prompts consumers to defer purchase decisions, clouding the outlook for corporate investment and creating a drag on growth.
Standard & Poor’s said Japan’s sovereign ratings were supported by its ample net external assets, relatively strong financial system following years of restructuring and diversified economy.