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2011-01-28 20:33:44
By Tetsushi Kajimoto and Lesley Wroughton Fri Jan 28, 2:02 am ET
TOKYO/WASHINGTON (Reuters) Japan and the United States faced new pressure to
confront their swollen budget deficits as the IMF and rating agencies demanded
more evidence they can bring their public debts under control.
The International Monetary Fund said the G7's two biggest economies needed to
spell out credible deficit-cutting plans before the markets lose patience and
dump their bonds.
On Friday, Japan's Prime Minister Naoto Kan vowed to push ahead with tax
reforms aimed at curbing the country's debt, but an uncooperative opposition
and divisions within his own party on policy make the chances of success slim.
"The important thing is to maintain fiscal discipline and ensure market
confidence in Japan's public finances," Kan, who took over in June as Japan's
fifth premier since 2006, told parliament's upper house.
Ratings agency Standard & Poor's cut Japan's long-term debt rating on Thursday
for the first time since 2002, and hours later Moody's Investors Service warned
the risk of the United States losing its top AAA rating, although small, was
rising.
Bond markets reacted calmly, but the latest warnings about the colossal
liabilities piled up by the two countries raised fears of rising borrowing
costs that could hamper attempts to restore fiscal discipline and consolidate a
fragile recovery.
"In advanced economies where fiscal sustainability has not been a market
concern, credible plans going well beyond 2011 need to be put in place urgently
to lock in benevolent market sentiment," the IMF said in its "Fiscal Monitor"
report.
The 2007/08 financial crisis prompted a dramatic rise in developed world debt,
as governments spent billions of dollars propping up sinking economies and
bailing out stricken banks.
In the United States, outstanding public debt has ballooned to more than 60
percent of total output since the financial crisis, and, with a record $1.5
trillion budget deficit expected this year, is set to grow further.
Japan is in an even worse position. Its debt has been growing for years as it
tried to revive the economy from a huge asset bubble burst in the 1990s and
outstanding long-term government debt now stands at around 180 percent of GDP.
Kan has made tax and social security reform, including a future rise in the 5
percent sales tax, a priority given the rising costs of Japan's fast-aging
society and a public debt that is the biggest among advanced nations.
POLITICAL CONCERNS
In Europe, where Greece and Ireland have been driven by bond market pressure to
take bailouts, many governments have adopted austerity measures to cut their
deficits.
But the IMF said new tax cuts in the United States and increased spending in
Japan had set back progress in rich nations more generally. Ratings agencies
fretted that politics is making reining in the deficit harder for both
countries.
Moody's worried that a U.S. Congress where the Republican now control the House
of Representatives might fail to consider and pass some of the deficit-reducing
measures proposed by a panel mandated by Democratic President Barack Obama.
S&P, which cut Japan's long-term sovereign rating to AA minus, voiced similar
concerns about Tokyo.
"In our opinion, the Democratic Party of Japan-led government lacks a coherent
strategy to address these negative aspects of the country's debt dynamics, in
part due to the coalition having lost its majority in the upper house of
parliament last summer," the agency said.
The debt fears hanging over much of the developed world underlined the
two-speed recovery from the financial crisis, which has seen emerging economies
rebound strongly, especially in Asia, while the traditional powers struggle.
"People are realizing that emerging markets are not as dangerous as other
places, in light of what has happened," Mark Mobius, chairman of Franklin
Templeton's Emerging Markets Group, told Reuters in Singapore.
"Emerging markets are still cheaper than developed markets despite the run up,
and we see continuing flows into emerging markets."
NO CRISIS YET
The reaction of bond markets indicated there is no immediate crisis on the
horizon for the United States or Japan, with the former protected for now by
its status as issuer of the global reserve currency, while Japan is sheltered
by the fact its sovereign debt stock is overwhelmingly held by domestic
investors with ample savings.
Japanese government bonds gained on Friday, recovering from a dip after the S&P
downgrade, although the Nikkei share average fell 1 percent.
"The immediate impact of the downgrade is negligible. It has long been accepted
that Japan is in an unenviable fiscal situation," said Nobuto Yamazaki, an
executive fund manager at DIAM Asset Management.
"But the downgrade highlighted the fact that the government's ability to follow
through with its policies is being questioned. This could be a negative factor
waiting to kick in if the government starts running into trouble trying to push
through budget-related issues."
U.S. Treasuries were little changed in Asian trade, with the benchmark 10-year
note up 1/32 in price to yield 3.41 percent, down a basis point from late U.S.
trade.
"I don't think there is any risk that U.S. Treasuries will have difficulty
finding a home and at a reasonable price at the moment. Particularly ... when
the Fed is basically giving out money for free right now," said Roland Randall,
senior strategist at TD Securities in Singapore.
"There is a bigger picture of a slow decline in the perception that people have
of whether the U.S. is a safe store of wealth or not. But that's a big
long-term picture."
(Additional reporting by Kevin Lim in Singapore and Ian Chua in Sydney; Writing
by Alex Richardson; Editing by Neil Fullick)