Several US firms have had a dramatic impact on Japan's economic policy, and another did so this week. This is both good and bad for the country, and I'll try to explain why here. In an effort to stimulate the slowing economy, the Japanese economy has followed a Keynesian spending plan, spending large amounts of money on things like public works. Most nations don't spend nearly as large a percentage of their national income, unless there are extenuating circumstances, like a war. So far, Japan's continued spending has failed to stimulate the economy and has left the government holding more debt than any other major economy.
Ratings represent the tradeoff between risk and return.
The downgrade of Japanese debt by the world's largest rating agencies is a sign that people are becoming wary of the political and economic conditions of the country. This, coupled with already serious suspicions of corruption in the environment can't be a force for stability. While this hurts the credibility of the national government, at the same time it may lend itself to one of our positives as well. Cited as one of the reasons for downgrading the country's debt was the government's failure to work on the rigidities of the economy. By rigidities, they mean Japan's stifling of competition, corrupt government and banking system, and other issues impeding free markets.