Rating Agency S&P Cites Political Chaos in Japan Bond Downgrade: Talk About Intangibles!

The financial world was rocked by S&P's decision to downgrade Japanese securities. What makes the decision even more momentous is the rating agency's citation of political chaos as a primary motivation for the negative move. This page and others believe that intangibles like reputation, management capability, innovation and others are long overdue to be included in formal assessments of financial risk and potential return. This is one more example of how metric convergence is growing in spite of global agreement on standards.

Yuka Hayashi has the story in the Wall Street Journal:


TOKYO—The downgrade of Japanese government bonds was as much about politics as economics.

In lowering its rating on Japan's sovereign debt Thursday, Standard & Poor's Ratings Services cited a lack of faith in the political system to solve huge economic challenges, concluding that the current weak prime minister would have no more success in reining in borrowing than his long line of weak, short-lived predecessors.

Prime Minister Naoto Kan is Japan's 15th leader in the past 22 years, the period when the country's borrowing ballooned to the largest in the developed world.

And while Mr. Kan has been bolder than many previous premiers in promising to attack the problem, he seems to lack the political clout to get those policies through parliament. His summertime pledge to raise taxes to curb the debt helped contribute to his current weakness, as voters turned control over one chamber of the legislature to the opposition, in part as a rebuke.

While the S&P downgrade itself wasn't a huge shock, given Japan's swollen borrowing, the timing caught many observers by surprise.

"In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics, in part due to the coalition having lost its majority in the upper house of parliament last summer," S&P said in its statement.

Following the July loss at the polls, Mr. Kan now finds it all but impossible to pass most types of legislation without time-consuming efforts to try win over opposition parties, often with drastic concessions.

A divided parliament has been a near-constant state in Japan in recent years, with voters' preferences shifting from one party to another with each major election, as they searched for new voices to speak for them following a long single-party rule.

Disappointment over politicians' inability to solve a long economic malaise, and challenges stemming from an aging and shrinking population, also have made voters impatient with political parties.

The severity of the current political deadlock became painfully clear this week as lawmakers returned to parliament for a new session.

Determined to boot the DPJ out of power and return to its long-held throne, the opposition Liberal Democratic Party made it clear that it will challenge every major issue, from the budget for the fiscal year starting April 1 to fiscal reform.

Accusing the DPJ of breaking campaign promises, LDP President Sadakazu Tanigaki demanded repeatedly—13 times on Wednesday alone—that the DPJ dissolve parliament and call general elections.

The contentious exchange at the onset of the new parliament session prompted a chorus of criticism in the Japanese media across the political spectrum.

"We really do not want to see the continuation of fruitless confrontations that takes policy debates hostage," the Nihon Keizai Shimbun said on its editorial page Thursday.

"We are facing a moment when parliament's raison d'etre is tested," the paper said.

That political climate also was a factor in the S&P decision. The agency's Japan analyst, Takahira Ogawa, said that while the government had given an appearance of being serious about fiscal restructuring, "the political situation has become more unstable" with the opposition taking a firmer stance against the government's program.

After persuading the opposition to engage in parliamentary debate, he must get their support to pass the budget in time for the new fiscal year.

He will also need to jack up popular support for the DPJ to deliver decent results in local elections to be held countrywide in April.

His failure could result in another big shift in the political landscape. That could be the replacement of the cabinet with a new prime minister, or general elections that could end with a major loss by the DPJ and a resulting party split.

"I tend to think this is simply a way station in a more basic transition in Japanese politics," says Kent Calder, director of Japan studies at Johns Hopkins' School of Advanced International Studies.

Mr. Calder said Japan could go through another round of political realignment this year.

"Japan would be far better off with a realignment because you need a party that has the ability to control both houses," he added