Moody's calls on BoJ to reflate economy
By David Pilling in Tokyo
Published: January 14 2003 11:29 | Last Updated: January 14 2003 20:06
Moody's on Tuesday said its outlook on Japanese sovereign debt would improve if the Bank of Japan took "more vigorous measures" to reflate the economy.
The rating agency's support for a change of BoJ policy will add to an already ferocious debate about who should replace Masaru Hayami as central bank governor in March. Junichiro Koizumi, prime minister, has said he will nominate someone committed to tackling deflation, but it is not clear how aggressively the new governor will pursue such a policy.
Moody's praised a proposal by Haruhiko Kuroda, who on Tuesday stepped down as vice-minister for international affairs at the finance ministry, that the BoJ set an inflation target of 3 per cent. Mr Kuroda is an outside candidate to take over as the BoJ's governor in March.
Mr Hayami has repeatedly rejected the idea of setting an inflation target, saying the bank has exhausted all orthodox tools to reverse falling prices. The bank, which has flooded the market with unprecedented liquidity, has nevertheless been accused of using deflation as a means of pressuring the government to adopt structural economic reforms.
Thomas Byrne, senior credit officer at Moody's, said that reflating the economy, while "not a silver bullet", would help reduce the country's growing debt burden.
"Ending deflation would lead to a rise in nominal gross domestic product. Everything else being equal and if supported by other policies that would lead to deficit reduction as a percentage of GDP."
Moody's caused enormous controversy in Japan last year when it downgraded Japan's sovereign debt by two notches to A2, the lowest of any G7 nation and on a par with a number of developing countries, including Botswana. Japanese officials said it was ridiculous to assign any default risk, since the vast bulk of Japan's debt was financed domestically.
Mr Byrne added that, while the appointment of an inflation-fighter would improve Japan's outlook, a governor without a strong anti-deflationary stance would not lead to an immediate downgrading. "If BoJ policy stayed unchanged after March, most likely we would not change the rating or the outlook," he said. The current rating assumed that debt, approaching 150 per cent of GDP, would continue to grow and that macro- economic policy would not change substantially.
However, current policies could not continue indefinitely, he said. "Something more urgent has to be done, and getting out of corrosive deflation is part of that."
Moody's assessment came on the same day that BoJ figures showed money supply growth in December at its most sluggish pace in nearly two years. Money supply rose 2.2 per cent from a year earlier, down from a rise of more than 3 per cent in recent months.
On Tuesday, Heizo Takenaka, the economy and financial services minister, said; "We recognise the need for more expansionary monetary policy."
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