Credit agencies put squeeze on Japan

The Japanese financial crisis has deepened so severely that the two biggest credit-rating agencies could be "just days away" from downgrading the country by two notches.

The cut would mean that Japan, which remains the world's second-biggest economy, would have the same credit ratings as Hungary, Mauritius and Botswana.

Although the two ratings agencies – Moody's and Standard & Poor's – have previously warned that Japan is on their watch list for a possible cut, Tokyo-based analysts are convinced that a batch of economic data due this week will force the agencies' hands. A two-notch drop by Moody's would take Japan from its current Aa3 level to A2. The equivalent move by S&P would lower AA to A+.

Japan has suffered a series of downgrades in recent years, but as its bad debt problem has worsened, and meaningful reform has been postponed, the ratings cuts have become far more frequent. Economists have forecast that unless the issues are addressed, public debt levels could soar higher, potentially reaching 500 per cent of GDP within five years.

Debt analysts at Nomura believe the Japanese prime minister, Junichiro Koizumi, may be losing his grip on the situation. His popularity rating has plunged, drastically reducing his chances of pushing through reforms to the banks and other areas of the Japanese economy.