Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Japan (long-term issuer local- and foreign-currency issuer and senior unsecured ratings: A/Negative; short-term local- and foreign-currency ratings: S-1/Stable) on 19 April 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Japan's A rating is underpinned by its i) wealthy, diversified and competitive economy, ii) very strong funding flexibility and excellent market access owing to the yen's safe-haven status and a favourable debt profile, which limit refinancing risks, and iii) a robust external position as the world's leading external-creditor nation supported by sustained current-account surpluses. Conversely, the credit weaknesses include the country’s significant structural challenges posed by a rapidly shrinking and ageing population, which i) exacerbates Japan's fiscal vulnerabilities due to rising pension and healthcare-related costs and a shrinking tax base and ii) constrains the country's already low growth potential.

The Japanese economy experienced modest growth of 1.0% in 2022 following 2.1% in 2021. Still, it is well insulated from the knock-on effects of the war in Ukraine compared to other major advanced economies. The recent unwinding of all Covid-19 measures, the resumption of tourism flows, expected private investment growth, the release of household savings, coupled with a recently announced fiscal stimulus package should support growth. Still, the outlook faces downward pressures from weakening global growth and rising commodity prices. High inflation is supporting a stabilisation in the debt-to-GDP ratio near term, but wide fiscal deficits and low growth will result in an upward trajectory in the debt ratio longer-term.

The Negative Outlook indicates that risks to the ratings are tilted to the downside over the next 12 to 18 months.

The ratings could be downgraded if, individually or collectively: i) the government fails to achieve meaningful consolidation and stabilise its debt-to-GDP ratio; ii) the growth outlook deteriorates substantially; and/or iii) an unexpected shift in monetary policies threatens funding flexibility or a tangible weakening in the yen’s reserve-currency status is observed.

Conversely, the ratings could be upgraded, or the Outlook revised to Stable if, individually or collectively: i) an appropriate and credible long-term fiscal consolidation plan stabilises the debt-to-GDP ratio and places it longer-term on a firm downward trajectory, and/or ii) the country’s growth potential increases tangibly, for instance thanks to effective structural reform.

For the updated report accompanying this review, click here.

The methodology applicable for the reviewed ratings and rating Outlooks (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Thibault Vasse, Associate Director.

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