A top financial analysis firm has downgraded Japan's credit rating due to slow progress on needed fiscal reforms. Standard & Poor's is calling for radical steps to revive the world's second largest economy.
Standard & Poor's said Wednesday that Japan's government was taking too long to clean up bad bank loans and cut public spending, key planks of Prime Minister Junichiro Koizumi's economic reform plan.
S&P also called Japan's financial sector crippled and said that in some respects the government is institutionally dysfunctional.
The U.S. based ratings agency gave these as some of the reasons behind its decision to downgrade Japan's credit rating to a third ranking AA. It also kept its negative outlook on Japanese credit.
Many economists, such as Richard Jerram of ING Barings in Tokyo, agree with S&P's analysis. "I think that the new administration has been really disappointing in terms of its short-term economic management and in terms of its ability to deliver on structural reform. In effect it has done nothing positive over the past six months," Jerram said.
In reaction to S&P's move, Japanese stocks fell two percent. Bonds rallied to their highest level in two months and the yen gained some ground against the dollar on relief the rating's cut was not deeper.
But S&P says Japan's rating could be trimmed again. Wednesday's reductions means that Japan has now joined Italy as among the lowest-rated of the industrialized nations.