By Ian Campbell
(Reuters Breakingviews) - A cut to Japan 's credit rating may not seem to mean much when the country already appears to live in a world of its own. But if Japan can be downgraded, so can Italy, and so can the United States. Standard & Poor's downward revision of the country is rightly reverberating globally as well as kicking the yen.
Japan's debt is obscenely high. Including short-term borrowings, the burden rises to twice GDP. Greece's debt is 150 percent of GDP, and yet Japan has not required a rescue. Far from it. Japan 's 10-year bonds are yielding only about 1.25 percent. The huge pool of domestic savings means the country, unlike other indebted economies such as the United States, does not need foreign savings. The Japanese government is therefore running a fiscal deficit of 9 percent of GDP and issuing still more debt, as though there is no constraint on its profligacy.
S&P's downgrade is reminder that all bad things may come to an end. Japan 's risks come in part from demographics and the world. The population is shrinking and aging. The old will have to be looked after. There will be fewer workers to do it.
The yen may fall further, helping to banish deflation and stimulate growth. But the slide would also carry a risk. A weaker currency and a stronger economy may mean more of the rampant inflation the world is feeling will pass through to Japan.
A recovering world helps governments fiscally but might intensify debt pressures. For Japan, only a small increase in bond yields would make the government's fiscal position disastrous. The debt is so huge that a crisis wouldn't require the catalyst of near-double-digit yields that sent Greece and Ireland into the arms of rescuers.
This should be a warning to other large and small economies that don't take their debt seriously. The Great Recession and deflation made the bonds of governments that were not at immediate risk of default appealing. It is now time for the market to reassess.
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