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S&P warns of possible economic blow, hit to Japan Inc from BOJ rate hike
Global Banking & Finance Review®
Company
By Leika Kihara
TOKYO (Reuters) – A future Bank of Japan (BOJ) interest rate hike could affect the country’s sovereign debt rating if firms struggle to absorb rising funding costs, an official at S&P Global Ratings said on Thursday.
Higher borrowing costs could also lead to a downturn in long-term economic growth, S&P said.
Japanese bond yields have crept up on market expectations the BOJ will phase out its yield control policy and start raising interest rates under a new governor who succeeds incumbent Haruhiko Kuroda in April.
While further rises in long-term interest rates could increase Japan’s already large debt burden, such factors are already taken into account in the current “A+” sovereign debt rating, said Kim Eng Tan, senior director of S&P’s sovereign ratings team in Asia-Pacific.
The bigger concern is whether Japanese firms, accustomed to many years of ultra-low interest rates, could absorb higher funding costs that come from tighter monetary policy, he told Reuters in an interview.
S&P expects the BOJ to tighten policy only gradually with the near-term impact on the economy likely limited, Tan added.
But the longer-term effect on Japanese firms and the broader economy is a concern as “we’re now at a stage where interest rates seem to be rising, and there’s quite a bit of uncertainty about how far it will go before it stabilises again,” he said.
Even a 1-2 percentage point increase in interest rates would have a big impact on Japanese firms, particularly those in the service-sector with low profits or high debt, Tan said.
“They’ve been used to a very low interest rate environment for quite a while. So it is really the impact on the economy that could potentially have an impact on our ratings,” he said.
S&P currently assigns an “A+” long-term and “A-1” short-term sovereign debt ratings on Japan. The outlook on the long-term rating is stable.
(Reporting by Leika Kihara; Editing by Kim Coghill)
A sovereign debt rating is an assessment of a country's creditworthiness, indicating the likelihood that it will default on its debt obligations. Ratings are assigned by agencies like S&P and can influence borrowing costs.
Monetary policy refers to the actions taken by a country's central bank to control the money supply and interest rates to achieve macroeconomic objectives like controlling inflation and stabilizing the currency.
Interest rates are the cost of borrowing money, expressed as a percentage of the total loan amount. They can influence economic activity by affecting consumer spending and business investment.
Economic growth is the increase in the production of goods and services in an economy over a period of time, typically measured by the rise in Gross Domestic Product (GDP).
Financial stability refers to a condition in which the financial system operates effectively, with institutions able to manage risks and maintain confidence, preventing crises that could disrupt economic activity.
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