Instant view: S&P cuts Japan debt rating

TOKYO (Reuters) - Standard and Poor's Ratings Services lowered its long-term sovereign credit rating on Japan to AA-minus from AA, citing worries that Japan's government debt ratios would continue to rise.

The news pushed the yen down against the dollar and sent Japanese government bond futures lower.

KEY POINTS:

-- S&P lowered Japan's long-term sovereign credit ratings to AA-minus from AA.

-- S&P affirmed Japan's A1-plus short-term sovereign credit ratings.

-- The outlook on Japan's long-term rating is stable, S&P said.

-- "The downgrade reflects our appraisal that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s," S&P said.

COMMENTARY:

TIM CONDON, HEAD OF RESEARCH, ASIA, ING FINANCIAL MARKETS, SINGAPORE

"Japan's public finance problems are a long-fuse issue. The downgrade doesn't mean a crisis is imminent. It signals increased vulnerability.

"Foreigners don't buy JGBs so the crisis risk comes from Japan's death-spiral demographics. The downgrade is bad for G3 government debt because it spotlights their weak public finances."

FRANCES CHEUNG, SENIOR STRATEGIST, CREDIT AGRICOLE CIB, HONG KONG

"The downgrade is not a total surprise as Japan was put on negative watch previously. But it does affect sentiment, together with some recent capital outflows from Asian markets. It will impact negatively on Asian currencies in the short term."

"Places that are seen not aggressive enough to tackle inflation may have a problem, but places like Korea and Thailand, their central banks are doing their jobs, so I expect continued inflows, though with short-term fluctuations."

MASARU HAMASAKI, SENIOR STRATEGIST AT TOYOTA ASSET MANAGEMENT, TOKYO

"Japan was downgraded as the (Prime Minister Naoto) Kan government has failed to show a clear stance to improve the country's fiscal situation. In such a situation, S&P had no choice but to downgrade Japan's sovereign rating.

"The yen came under some pressure after the downgrade, but in general, the market is reacting relatively calmly to the news as such a move was somewhat expected to happen.

"With regards to Japanese government bonds, I don't expect today's downgrade would trigger strong sales. Japan's CDS spreads have been widening since around November. I think the market was factoring in such a move would happen."

KOJI FUKAYA, CHIEF FX STRATEGIST, CREDIT SUISSE, TOKYO

"Since there has been speculation that JGBs could be downgraded at any time, the downgrade itself is no surprise.

"But the forex market, which has become sensitive following the sovereign issue in Europe, is reacting to the downgrade by selling yen.

"Since the ratio of foreign investors holding JGBs is low, it is doubtful there will be a direct market impact if the downgrade prompts foreign investors to unload JGB holdings.

"As of now, speculators are still long in yen. If these speculators turn short in yen or investors, including retail investors, accelerate yen-carry trades, then there is the possibility that the yen will weaken further."

SEBASTIAN QUADRAT, ANALYST, and SHPENDI CITAKU, SALES TRADER, CLSA-JAPAN, TOKYO

"Japan's debt-rating cut by S&P to AA-, the first cut since 2002.

"The real concern is that the Japanese government will be unable to issue JGBs forever -- and to sustain an aging population.

"Additionally, it looks increasingly likely that the current (and previous) Japanese government(s) have not had either a strategy or the will to tackle the budget deficit and the corresponding debt.

"Floating ideas like a raising of the sales-tax (to 10 percent from the current 5 percent) have met with very little support -- in fact, the idea(s) have actually met a great deal of resistance from the opposition and from within the Party itself. We can most likely expect to see this theme playing out for the next several years.

"One important point to note: JGBs are, by-and-large, sold to a domestic investor base; it is, therefore, rather unlikely that this ratings downgrade will have any real long-term impact (as opposed to almost every other market in the world which is dominated by foreign buying/selling). Japan holds Japan's debt ... the yen sell-off will most likely be short-lived; it's reactionary rather than fundamental."

THOMAS LAM, GROUP CHIEF ECONOMIST, DMG & PARTNERS SECURITIES Pte Ltd, SINGAPORE

"Japan, compared to other developed economies, has the worst fiscal position. Having said that, the reason why Japan was able to sustain its ratings for so long is the fact that the proportion of domestically owned debt was the highest at more than 90 percent or so.

"I don't think this is a shocking downgrade. This is the signal that rating agencies are looking closely at the debt and they should do something about this, otherwise they will eventually face a bigger problem than Europe if they take this for granted."

MAKOTO YAMASHITA, CHIEF JAPAN INTEREST RATE STRATEGIST, DEUTSCHE SECURITIES, TOKYO

"It is not a surprise as I expected this to happen at some point. Other ratings agencies may follow suit.

"But this downgrade alone won't change investors' stance toward JGBs. It won't boost yields because JGBs are predominantly held by domestic investors.

"This is an alarm bell for Japan that it needs to proceed with fiscal reform while JGBs continue to be held predominantly by domestic investors."

MASAFUMI YAMAMOTO, CHIEF FX STRATEGIST JAPAN, BARCLAYS CAPITAL, TOKYO

"The timing was a surprise. We couldn't say when, but it was regarded as a kind of time bomb. It's not just Japan. Earlier it was the European sovereign debt crisis.

"The JGB holdings of foreigners is very low, below 10 percent, so the actual selling (impact) may be limited."

MARKET REACTION:

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BACKGROUND:

-- Japan has the highest debt burden of any advanced nation, at double the size of its economy, and worries have mounted about the burden of keeping up with welfare costs for its aging population.

-- Politicians and credit agencies have been warning for years that Japan needs to lower its debt pile but progress has proved elusive.

-- Japanese Prime Minister Naoto Kan has staked his political career on overhauling the social welfare system and raising the sales tax to ease the country's strained public finances.