S&P's downgrades Japan to AA-

Yesterday Standard & Poor's lowered the long-term sovereign-debt rating of Japan by one notch to AA- from AA, the first downgrade for Japan since April 2002. The surprise downgrade has put Japan on a par with China, Taiwan, Saudi Arabia and Kuwait. S&P foresees Japan's fiscal deficit remaining at high levels for several years while it expressed a skeptical view on the ability of the current government by saying "In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address the negative aspects of the country's debt dynamics." Moody's Investor Services said it was maintaining its own AA2 rating, but echoed worries over political gridlock.

The JGB market showed little change yesterday and today. 95% of outstanding JGBs are held by domestic institutional and retail investors, who are wary of long-term prospects but convinced that near-term credit risk is minimal, surely not more than that of AA-rated Spain.