Moody's: Japan to Recover from Quake; Fiscal Effects Less Predictable - The Indonesia Today

Moody's Investors Service says that the shock from Friday's earthquake does not make a fiscal crisis in Japan imminent, while the country's deep and liquid government debt market will likely continue to fund government deficits, and an even a larger deficit as a result of the quake, at an exceptionally low cost.

"However, a tipping point may be reached at some point if the market loses confidence in the soundness of government finances, and demands a risk premium on government bonds. The earthquake may have shifted such a potential tipping point a bit forward, unless Japan's political parties are galvanized by the crisis to also address the country's long-term fiscal challenges," says Thomas Byrne, a Moody's Senior Vice President.

Byrne was speaking on the release of a special comment -- which he authored -- on the implications of the quake for Japan's sovereign ratings.

Prime Minister Kan on Sunday was quoted in the Nikkei as saying that the earthquake and tsunami "is the biggest crisis facing the country since World War II." The extent of the devastation will take time to gauge fully, but already ripple effects beyond the devastated zones are being seen in curtailed electricity supplies and in suspended production in some automobile, steel and refining plants.

"Nevertheless, we see the Japanese economy as having the ability to absorb the shock over time. In general, large, wealthy economies have demonstrated a capacity to absorb localized natural disasters," says Byrne. "And Japan's $6 trillion economy, approximately equal to Germany's and Italy's combined, is indeed large."

"Stability to the economy in the weeks ahead will also be provided by the Bank of Japan, which has pledged to support exceptional demands in the financial sector, and already provided about JPY55 billion in emergency liquidity to 13 financial institutions over the weekend," says Byrne.

Moreover, reconstruction spending will likely prove to be a very effective and justifiable fiscal stimulus, and will offset immediate losses in production and demand.

However, the immediate fiscal costs of the earthquake to the central and regional governments will likely halt any progress in reducing the large budget deficits which resulted from the global financial crisis and recession. Yet, Moody's considers that Japan has ample domestic savings to accommodate increased government funding needs.

Moreover, the country also has at its disposal the largest stock of net international assets, equal to 59% of GDP as of 2009, of any large, advanced economy, to help as well. The yen will likely remain stable, minimizing the financial impact of the natural disaster.

In terms of the possible financial effects on affected regional and local governments, given the long history of risk socialization in Japan, Moody's would expect that they would be would be mitigated by the sharing of such costs with the central government in Tokyo.

Although we do not currently know how the damage and reconstruction costs will be allocated between public funds, private insurance and private savings, in the case of the 1995 Kobe earthquake, public funds assumed much of the burden.

Finally, Moody's recognizes that the immediate focus of the government must be on emergency relief and reconstruction efforts, no matter what the fiscal cost. Indeed, both the ruling and opposition parties agree on the need for a quick and effective response to the immediate crisis.

However, Moody's remains concerned over the lack of a commensurate sense of unanimity and urgency to address the longer-term need for fiscal and economic reform and debt containment.