The contrast is striking. Three weeks ago, when Standard & Poor’s dared to opine that the United States of America’s creditworthiness was not what it used to be, investors went into paroxysms. On Wednesday, Moody’s made a similar observation about Japan; the market reaction was imperceptible. The Nikkei stock index closed a mere 1 per cent lower (Hong Kong stocks closed down 2 per cent), while Japanese government bonds barely twitched.
There are three important reasons for the differing reactions. The first is that there is no market taboo about discussing the deterioration of Japan’s public finances. Moody’s single-notch downgrade, to Aa3, is the latest in a series of mostly downward revisions from the three rating agencies since 2000. Second, while the Japanese government has a chronic debt problem, the private sector does not: negative net worth at the general government level is more than offset by the positive positions of public and private corporations, households and non-profit institutions. As Moody’s puts it, those investors have an “undiminished home bias” and an enduring attachment to bonds, which allows the state’s deficits to be funded at the lowest nominal rates globally. Last week the benchmark 10-year bond yield dipped below 1 per cent for the third time in the past 12 months.
Finally, Japanese politicians do not have the American conviction that Something Must Be Done about the deficit. Three of the four Democratic Party candidates to replace Naoto Kan as prime minister have yet to outline plans to contain the national debt. Really radical ideas – such as Japan selling off its US Treasury holdings to fund the reconstruction of the Tohoku region – continue to come from the fringes. At least there is a sense of crisis in the US. Notwithstanding the stable funding, Japan needs to feel the same degree of urgency.