S&P warns Japan over rating threat after disaster

Standard & Poor (S&P) yesterday threatened to cut Japan's sovereign credit rating again just three months after it last downgraded the country's debt.

The rating agency said the huge cost of last month's earthquake and tsunami will damage weak public finances unless squabbling politicians can agree to raise taxes. S&P confirmed its long-term sovereign credit rating on Japan at AA minus but relegated the outlook to negative from stable.

S&P cut Japan's sovereign credit rating in February for the first time since 2002, accusing the government of lacking a plan to deal with its mounting debt and warning that the divided government had made the problem worse.

In a further sign of weakness in Japan's beleaguered economy, retail sales tumbled 8.5 per cent in March –the biggest fall for 13 years. The country ground to a halt last month even in areas not affected directly by the giant earthquake and its aftermath.

Japan's public debt is twice its $5trillion (£3trn) economy and will swell further as the country spends heavily on reconstruction after the disaster, S&P said.

"If there are no revenue enhancing measures such as tax increases, we expect the central and local governments to bear most of this cost," S&P said.

Budget deficits have put pressure on major nations' sovereign ratings and borrowing costs as the economic crisis has moved from the financial sector to public finances. Last week S&P downgraded its outlook on the AAA rating of the US, where politicians are also wrangling over how to deal with the country's overweening deficit.

The European Union is also facing a critical test as crises in Greece, Ireland and Portugal mount up to the worst crisis since the euro was launched.