Japan's Credit Rating Takes a Hit; Is the US Next?

Sometimes political deadlock can affect your credit score.

That's a lesson Japan learned today when the ratings agency Standard & Poor's lowered by a notch the credit rating of the world's third-biggest economy, citing Japan's mammoth government debt and a divided parliament that might prove incapable of tackling the country's severe economic troubles.

What S&P didn't say today was that the United States has some of those same credit worries. S&P and rival credit agency Moody's suggested earlier this month that the American credit rating could be at risk.

For Japan, the downgrade from AA to AA- for its long-term sovereign debt is particularly humbling, since that's the same rating given to the government bonds of China, which surpassed Japan last year to be the second biggest economy after the U.S.

S&P said it expects Japan's debt ratios, among the unhealthiest in the world and much worse than most industrial countries, will continue to rise more than the agency forecast before the global economic crisis hit and that they won't peak for at least a decade and a half.

Japan's budget deficit -- expected to be more than double the country's gross domestic product this year and considerably higher than even Greece's deficit -- probably won't shrink much in the coming years, S&P said.

Japan's situation isn't helped by the persistent deflation there or the fast-aging population that translates into a surge of social security spending that will make up 31 percent of Japan's budget this year.

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But what really seems to worry S&P is that the governing Democratic Party of Japan controls just one house of parliament and is so politically weak it's in no position to deal with these problems.

"The Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics," S&P said. "We even see a risk that the Diet [the lower house of parliament] might not approve budget-related bills for fiscal 2011, including government financing authorization."

Still, Japan is in no danger of being unable to pay its debts.

The yen remains a valued reserve currency held by other nations. And Japan's own cache of gold and foreign currency reserves -- including a sizable holding of U.S. dollars and Treasury bonds -- is second only to China's with a value of more than $1 trillion.