Standard & Poor’s reduced the Japanese credit rating from AAA to AA-, a drop of one notch. While this is not a huge reduction and is still the second best credit rating available, the markets reacted very negatively to the news as it reminded investors that sovereign debt concerns are not just restricted to peripheral European nations.
It is especially concerning as Japan is the world’s second largest economy and is considered to be a safe haven for investors. Any perceived increase in risk will alter the perception of the Japanese Yen. Japan now has a worse credit rating than Holland, France and Great Britain.
S&P said that is was downgrading Tokyo’s credit rating because it was concerned that Japan’s debt would continue to grow by more than it had previously forecast. The Yen dropped by over 1% against the US Dollar, Sterling, Euro and the Swiss Franc, though losses have been regained somewhat during early trading on Friday.
In further news the Australian Dollar also weakened against the major currencies after Prime Minister Gillard said the nation’s floods would cost AUD 5.6bn and would reduce GDP growth by 0.5%. The Australian government have announced a one off tax to raise AUD 1.8bn to help to pay for the reconstruction. Gillard announced that she didn’t want to turn to the debt markets to finance this.
Market reacted negatively to this as a fiscal stimulus was expected instead. By imposing an additional tax, analysts are concerned about the extra pressure now added to the Australian economy.
Additionally the Federal Open Market Committee (FOMC) meeting in America went without event, with interest rates kept the same and a slight change to forecast inflation. The Reserve Bank of New Zealand also kept interest rates on hold at 3%.
