Japan’s sovereign creditworthiness is weakening

In mid-September, Standard & Poor's downgraded Japan's sovereign credit rating by one notch to "A+", assessing that the government's strategy to revive economic growth and end deflation has not been successful enough to support the prior rating level. Fitch and Moody's lowered their ratings on Japan to "A" and "A1" in April 2015 and December 2014, respectively. Despite Japan's private sector wealth, large institutional savings, strong external position, and stable financial system, credit quality is weighted down by the country's public sector indebtedness (close to 250% of GDP), muted economic performance, and unfavourable demographics. 

Japan's ultra-accommodative monetary policy stance will remain in place for the foreseeable future. In fact, the Bank of Japan (BoJ) may consider additional stimulus measures to complement the current asset purchase program, which is set to increase the monetary base by ¥80 trillion annually. The headline inflation rate has dropped over the past few months - reaching 0.2% y/y in August - after the April 2014 consumption tax rate hike fell out of the annual inflation arithmetic. Given few signs of demand-driven inflationary pressures, the BoJ's 2% target for core inflation (which excludes fresh food) remains a distant prospect. 

In September, Shinzo Abe was re-elected as the head of the Liberal Democratic Party and he will continue as prime minister for another three-year term until 2018. This should allow him to focus on further economic revival strategies and structural reforms, such as the deregulation of the labour market and agriculture.