Japan may be Looking at a "Lost Decade" Hat Trick

With the nuclear crisis in Japan, Moody’s is now worried that Japan could be looking at a third “lost decade” and a continued limping economy. For twenty years already, Japan has been compounding its load of government debt, which is already highest among the industrialized countries.

Moody’s has specifically focused on the nation’s inability to fulfill its own June 20th deadline for setting into motion a strategy to reduce its debt, and is close to downgrading Japan’s credit to bring its rating in line with the lower opinions of Standard & Poor’s and Fitch.

According to Reuters:

“‘While Japan is likely to have a V-shaped recovery later this year from the March 11 earthquake, subsequent economic growth may subside to a lacklustre pace,’ Moody’s said in a statement on its website. ‘It is not inconceivable the country would have a third “lost” decade of growth,’ it said. Japan’s economy has stagnated since an asset price bubble burst in 1990, leaving banks with high debts and an economy in deflation.

“GDP growth in the decade up to the global financial crisis in 2008 was about 1.3 percent a year, less than half the 3 percent pace achieved by the United States. ‘Moody’s view is understandable,’ said Seiji Adachi, senior economist at Deutsche Securities. ‘The possibility of another “lost decade” for Japan is growing.’ He said higher electricity bills, a rise in the sales tax and the possibility of higher income tax for funding reconstruction after the March disaster would leave Japanese with less spare cash.

“‘The combination of three burdens is likely to depress economic growth,’ Adachi said. Rapid ageing of Japan’s society and a decline in household savings are expected to weigh on the economy in the future and place further strain on government finances. At twice the size of the economy, Japan’s public debt is the highest in the industrialised world. All three major ratings agencies have their fingers poised on the trigger to downgrade Japan’s credit status because of the government’s failure to come up with a feasible plan to reduce the debt in the years ahead.”

The problem has been largely exacerbated by Prime Minister Naoto Kan’s indecision on a timetable for precisely when he will quit Japan’s top job, a pledge he made in the aftermath of the March earthquake. Until at least that step is taken, Moody’s will keep its crosshairs fixed on Japan’s Aa2 local and foreign currency ratings.You can read more details in Reuters coverage of how Japan could face a third lost decade.


Rocky Vega,
The Daily Reckoning