Fitch cuts Japan credit rating outlook to negative

(Reuters) - Ratings agency Fitch on Friday cut its outlook on Japan’s sovereign debt, warning that the vast cost of a March earthquake and tsunami and the still-unknown bill for the clean-up after the nuclear disaster would further strain the country’s already shaky public finances.

The Fitch move means all three major ratings agencies now have their fingers poised on the trigger to downgrade Japan’s credit status unless they see moves by the government to strengthen the country’s finances.

Fitch cut its outlook to negative from stable and affirmed its AA minus local currency rating, its fourth highest and the same level as S&P’s but one notch below Moody’s Aa2.

“A stronger fiscal consolidation strategy is necessary to buffer the sustainability of the public finances against the adverse structural trend of population ageing,” Andrew Colquhoun, head of Fitch’s Asia-Pacific Sovereigns team, said in a statement.

The yen fell moderately against the dollar and the euro immediately after the move, which follows a similar downgrade by Standard & Poor’s last month, although most market focus was on Europe’s debt problems.

Responding to the Fitch news, the Japanese government offered assurances that it would continue efforts to bring public finances back under control.

Public debt is already twice the size of the $5 trillion economy, the heaviest burden among industrialised economies, and is set to swell further as the government deals with the cost of the disasters.

“On the one hand, Japan is working hard to rebuild. On the other hand, it is a given that it works hard on fiscal soundness,” Deputy Chief Cabinet Secretary Tetsuro Fukuyama told reporters at a Group of Eight summit in the northern French seaside town of Deauville.

Despite such assurances, investors and political commentators doubt Prime Minister Naoto Kan’s government can make much headway in plans to reform tax and social security while he struggles with the nuclear crisis, a deepening rift in his own party and a threat of a no-confidence vote.

Several ruling party lawmakers, including its former leader, have criticised Kan for his response to the disaster and oppose efforts to rein in debt by cutting back on election campaign pledges.

Analysts played down any potential market impact of the latest downgrade, saying it simply affirmed the widely held view of the challenges facing Japan.

“There is nothing surprising in Fitch’s action,” said Katsuyuki Tokushima, chief fixed-income strategist at NLI Research Institute in Tokyo. “It rather seems belated given the dire political situation in Japan. Fitch’s outlook downgrade is unlikely to impact bond and credit markets.”

While noting that government spending on rebuilding the quake-ravaged areas could boost the economy in 2011 and 2012, Fitch singled-out the potentially huge costs of cleaning up after the Fukushima plant disaster as a serious risk.

“There is considerable downside risk for the public finances from the still-unknown cost of cleaning up the Fukushima nuclear plant, while delays in restoring power supplies could lead Fitch to revise down its 2011 growth forecast from 0.5 percent.”

Fitch said another risk was that delays in restoring damaged infrastructure could persuade more Japanese companies to move abroad, leading to a permanent loss of economic output.

The March 11 earthquake and tsunami killed around 24,000 people and triggered the world’s worst nuclear accident since Chernobyl.

The disaster tipped the economy into a recession in the first quarter, data showed this week and the Organisation for Economic Co-operation and Development forecast the economy would shrink 0.9 percent this year.