Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases 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 of Japan (long-term local- and foreign-currency issuer and senior unsecured debt ratings: A/ Stable Outlook; short-term local- and foreign-currency issuer ratings: S-1/ Stable Outlook) on 3 September 2024.

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 ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, click here.

Japan’s single-A long-term ratings are underpinned by the following credit strengths: i) a large, wealthy and competitive economy; ii) strong funding flexibility and still rock-bottom rates by comparison against that of global sovereigns – anchoring a favourable nominal growth compared against nominal interest-rate disparity, a significant domestic investor base, independent monetary policy and debt monetisation, alongside outstanding government assets; and iii) a robust external position and the reserve-currency status of yen.

Japan’s credit ratings are challenged by: i) an elevated gross government debt stock; ii) the economy's comparatively low nominal growth potential – linking to a shrinking and ageing population alongside an historical record of deflation – although inflation has recently improved meaningfully; and iii) rising pension and health-care-linked costs and rising investment requirements for green transition and national defence.

The sovereign’s elevated debt stock, representing the highest ratio of general government debt as a share of GDP of any rated sovereign, presents a risk especially over the very long run with Scope forecasting the general government debt ratio to stay comparatively stable around or slightly above 255% until 2029. Nevertheless, Japan has been among the select sovereigns on balance helped, rather than harmed, by the cost-of-living crisis of recent years, seeing recent elevated inflation breaking the economy’s previously long-standing record of deflation and furthermore helping curtail elevated sovereign debt ratios. Until recently, deflation has been the core constraint for debt sustainability and furthermore a limitation for (real) output growth. Although the phase of inflation over-shooting of recent years is not clear evidence of any “defeat of deflation” yet, inflation has displayed stickiness, with annual headline inflation of above 2% since April 2022. The government has aimed to support sustainable inflation by reflating wage growth. After record wage hikes of Rengo, the largest union-trade group, this past March, a 5% hike of the minimum wage is seen being adopted in the coming months. Scope currently projects headline inflation of 2.6% on average for this year before 2.3% next year.

The government drafted a long-run economic and fiscal programme spanning six years from April 2025 until fiscal year (FY) 2030 – demonstrating furthermore more-realistic forecasting assumptions embedding nominal growth driven mainly by inflation rather than by elevated (real) growth. Authorities have consistently re-affirmed commitments to budgetary consolidation. Nevertheless, repeated recourse to supplementary budgets and budget-stimulus programmes has weakened credibility of medium-run budgetary planning.

Finally, debt sustainability is anchored by a favourable public debt structure as illustrated by the comparatively-long average maturity of above eight years of the debt, a high share of the bonds and treasury bills being domestically held (86%) and bonds and bills being entirely denominated in yen as of the end of FY2023.

The Stable Outlook represents Scope Ratings’ opinion of risks for the ratings remaining balanced.

The ratings/Outlooks could be upgraded if, individually or collectively: i) public debt-to-GDP declines meaningfully, supported by higher nominal economic growth and/or ongoing budgetary-consolidation initiatives; and/or ii) stronger sustainable economic growth is achieved.

Conversely, the long-term ratings/Outlook could be downgraded if, individually or collectively: i) debt sustainability weakens significantly, due to material rises of government debt-to-GDP and/or the interest-payment burden; and/or ii) the government’s funding flexibility were significantly curtailed and/or the strength of the yen as a global reserve currency weakened.

The methodology applicable for the reviewed ratings and rating Outlooks (Sovereign Rating Methodology, 29 January 2024) 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 Dennis Shen, Senior Director.

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