S.&P. Downgrades Japan as Debt Concerns Spread

Standard and Poor’s lowered its sovereign credit rating for Japan to AA- down from AA. That is three levels below the highest possible rating, and S.& P.’s first downgrade of Japanese government debt since 2002. With the lower grade, Japan’s debt rating is now on par with China’s, which overtook Japan as the world’s second-largest economy last year, after the United States.

S.& P.’s move came just weeks after both it and its rival ratings agency, Moody’s, cautioned that they might take a more negative stance on the United States. It highlighted just how deeply indebted many of the world’s developed economies remain — despite concerted efforts on the parts of governments to improve their balance sheets.

But by size, Japan’s ballooning deficit is an anomaly. Japan’s liabilities will hit 204 percent of its gross domestic product this year, overshadowing even the 137 percent for beleaguered Greece, according to figures from the Organization for Economic Cooperation and Development.

Moody’s affirmed its Aa2 rank for Japan, the third-highest grade.

S.&P., in downgrading Japan, warned that the Japanese government had no “coherent strategy” to address its ballooning deficit, and that its already high debt burden was likely to continue to rise further than it had anticipated before the financial crisis. A rapidly aging population is adding to the country’s woes, raising the likelihood of increasing social security and pension obligations in the future.

S.&P. said it expected Japan’s debt to continue rising until the middle of this decade, and “we do not forecast the government achieving a primary balance before 2020, unless a significant fiscal consolidation program is implemented beforehand.”

Kaoru Yosano, Japan’s newly installed economy minister, said that the S.&P. move was “regrettable” and that he believed the Japanese government’s efforts to reduce the debt burden had not been fully understood.

“I believe confidence in Japan will not be shaken,” he said late Thursday. The yen, which has been soaring — another of Japan’s burdens — fell against the dollar on the news, reaching 83.22 yen to the dollar. It recovered somewhat later in the day, to 83.00 yen.

Prime Minister Naoto Kan had little reassurance to offer. “I just heard that news,” a flustered-looking Mr. Kan told reporters. “I am a little ignorant on those kind of matters,” he said. “Let me look into it more.”

The United States, France, Germany and Britain are among major economies that retain AAA ratings, although some investors suspect that they, too, may become more vulnerable if growth slows anew or if their public finances fail to improve.

This month, Moody’s and S.& P. both warned that the AAA rating for the United States could be reviewed in a couple of years if its debt keeps growing. Bu a downgrade appears unlikely as long as the United States economy and the dollar retain their dominance on the global economic stage.

Meanwhile, the debt levels of several of Europe’s smaller economies on the periphery of the euro zone have raised worries about possible defaults and more pain for the banking system. Since the onset of the sovereign debt crisis in the euro zone early last year, the main ratings agencies have downgraded the sovereign credit of a number of countries, including Greece, Ireland, Spain, Portugal and Belgium.

Speaking Thursday on the sidelines of the World Economic Forum in Davos, Switzerland, John Lipsky, first deputy managing director of the International Monetary Fund, suggested the action highlights debt problems in developed countries.

“All the advanced economies face long-term fiscal challenges,” Mr. Lipsky said. “These problems have been brought into focus by the crisis. These issues need to be addressed.”

Despite the staggering size of Japan’s debt-to-G.D.P. ratio, most of Japan’s debt is held domestically, unlike that of Greece or the United States. And Japan runs a current account surplus in trade, putting it on a more stable financial footing. With Japanese household assets close to $17 trillion, Japan has a big pool of domestic deposits to draw on, and government policy encourages long-term investors like banks, pension funds and  insurance companies to buy up bonds.