Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations that may act as a lender of last resort.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic 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 rating’s 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 announces the result of each monitoring review on its website and/or on its subscription platform ScopeOne.

Scope completed the monitoring review for Japan (long-term local- and foreign-currency issuer and senior unsecured debt ratings: A/ Stable Outlook; short-term local- and foreign-currency issuer ratings: S-1/ Stable Outlook) on 1 August 2025.

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 ratings history can be found on scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, please see here.

Japan’s single-A long-term ratings are underpinned by the following credit strengths: i) a large, wealthy and competitive economy; ii) strong funding flexibility supported by JGBs’ status as a core global safe asset, a significant domestic investor base, independent monetary policy and debt monetisation, and significant government assets; and iii) a robust external position and the reserve-currency status of yen.

Japan’s credit ratings are challenged by: i) an elevated gross government debt stock; ii) the economy's still comparatively moderate nominal growth potential reflecting a shrinking and ageing population; and iii) rising pension and health-care-linked costs and rising investment requirements for green transition and national defence.

The sovereign’s elevated debt stock, representing the highest ratio of general government debt as a share of GDP of any rated sovereign, presents a key credit challenge. Scope expects the budget deficit to remain elevated over the forecast horizon. The government’s target to achieve a primary surplus may be further delayed following the July 2025 House of Councillors election. The more fragmented political environment could result in some fiscal easing given continued spending pressures and the repeated recourse to supplementary budgets and budget-stimulus programmes in past years. The latest agreement to abolish the provisional gasoline tax rate underlines the political pressures the coalition is facing from opposition parties and the population as households face cost-of-living pressures.

Nevertheless, Scope forecasts Japan’s debt-GDP ratio to remain relatively stable at around 230% over the forecast horizon, after 237% in 2024. This trend is supported by the recent uptick in inflation which remained above 2% since April 2022 and stood at 3.3% in June 2025. Scope expects inflation to average 3.3% in 2025 and 2.6% in 2026. While policies will need to adjust to the new inflationary environment after a long history of deflation, controlled and stable inflation supports debt sustainability in the case of Japan.

Finally, debt sustainability is anchored by a favourable public debt structure as illustrated by the comparatively long average debt maturity of above eight years, a high share of government debt being held domestically (88%) and bonds and bills being entirely denominated in yen. The 30-year bond yield rose to record highs of above 3% in recent months. However, this steepening at the long end of the curve can in part be explained by lower demand from insurance companies who match their liabilities with the purchase of long-dated issuances. The rise in 10-year yields was more moderate, with yields currently around 1.5%.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced.

Upside scenarios for the ratings and Outlooks are (individual or collectively):

1. Public debt-to-GDP declining meaningfully, supported by higher nominal economic growth and/or budgetary-consolidation initiatives;
    
2. The achievement of stronger sustainable economic growth.

Downside scenarios for the ratings and Outlooks are (individually or collectively):

1. Significant weakening debt sustainability, such as from a material rise in interest payments above current projections or weakening debt structure;
    
2. An unexpected deterioration in the government’s funding flexibility and/or weakening of yen’s strength as a global reserve currency.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 January 2025) is available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Eiko Sievert, Executive Director

© 2025 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab 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. Public Ratings are generally accessible to the public. Subscription Ratings and Private Ratings are confidential and may not be shared with any unauthorised third party.