Scope Ratings GmbH ("Scope") monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings' performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Japan (A/Stable; S-1/Stable) on 23 November 2021. This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Japan's A rating is underpinned by its i) wealthy, diversified and competitive economy, ii) very strong funding flexibility and excellent market access owing to the yen's safe-haven status and a favourable debt profile, which limit refinancing risks, and iii) a robust external position as the world's leading external-creditor nation supported by sustained current-account surpluses. Conversely, the credit weaknesses include the country’s significant structural challenges posed by a rapidly shrinking and ageing population, which i) exacerbates Japan's fiscal vulnerabilities due to rising pension and healthcare-related costs and a shrinking tax base and ii) constrains the country's already low growth potential. Japan has responded counter-cyclically amid the Covid-19 crisis, implementing large fiscal stimulus packages in support of the economy. The Covid-19 shock has led to a deterioration in the country’s economic and fiscal outlooks, raising the need for a credible post-crisis fiscal consolidation strategy. An additional JPY 55.7trn (9.9% of 2019 GDP) stimulus package was announced by the government though its effectiveness remains to be seen. Scope expects the economy to recover gradually as restrictions ease, global demand picks up and extensive fiscal spending is implemented. While the government remains committed to addressing these significant challenges with a strong focus on structural reform, Scope deems material fiscal consolidation within the forecast horizon unlikely under a context of low growth and muted inflation prospects.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months. The ratings could be upgraded or the Outlooks revised to Positive if, individually or collectively: i) an appropriate and credible long-term fiscal consolidation plan stabilises the debt-to-GDP ratio and places it longer-term on a firm downward trajectory; and/or ii) structural reforms accelerate to raise the country’s growth potential. Conversely, the ratings could be downgraded or the Outlooks revised to Negative if, individually or collectively: i) growth prospects were to deteriorate significantly, damaging fiscal dynamics; ii) financial system risks increase meaningfully, weighing on macro-economic stability; and/or iii) there is a material weakening in the external position.

For the updated report accompanying this review, click here.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 8 October 2021) is available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Thibault Vasse, Senior Analyst

© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.