Standard & Poor’s downgrades Japan’s credit rating to AA-, default imminent?

Standard & Poor’s rating agency has cut Japan’s long-term sovereign debt rating today for the first time within 8 years since 2002 explaining that the country's government lacked a coherent plan to tackle its mounting debt.

The rating for the largest Asian economy was downgraded to AA-, three levels below the highest possible rating, which serves as a warning sign for other developed nations such as those in Europe and the United States, of the growing concerns about the debt built up during the global financial crisis.

Julian Jessop, chief international economist at Capital Economics in London, warned of the consequences if Tokyo failed to get its fiscal house in order.

"If it looks like making a mess of this, further downgrades will surely follow. Given the size of Japan's economy and the current sensitivity of global financial markets to sovereign debt concerns, the impact would be felt worldwide."

Japan's outstanding long-term government debt is set to reach 869 trillion yen ($10.57 trillion) at the end of March this year, or 181 percent of gross domestic product (GDP), the Ministry of Finance says.

If short-term debt is added, Japan's liabilities will hit 204 percent of GDP this calendar year, larger than 137 percent for Greece and 113 percent for Ireland, according to the OECD.

Analysts say a Japanese debt default is unlikely because of Japanese household assets of some 1,400 trillion yen, three times bigger than economic output provide a healthy pool of savings to fund the borrowing.