Moody's Investors Service, the U.S. credit rating agency, downgraded Japan's yen-denominated government bonds from Aa1 to Aa2 on September 9. As a result, Japanese government debt is now considered to be as risky as debt issued by the governments of Spain and Portugal. However, the Japanese government and financial markets have taken the downgrade with a grain of salt. Shizuka Kamei, the chairman of the Liberal Democratic Party's Policy Research Council, laughed it off, and instead tried to cast doubt on Moody's research capabilities. And on the day that Moody's made its announcement, the yen appreciated, and bond prices and the Nikkei index rose.
Some foreign observers find the lack of response to the downgrade unsettling.
Japan's government bond market is closed, and moves solely in reaction to domestic factors. Although Japan still has a serious public debt problem, the lack of concern in both Japanese and foreign markets may reflect the fact that investors have become so numbed by the scale of Japanese government debt that they can no longer assess its risk. If that is the case, there is a danger that Japan could once again drift down the path toward isolationism. Wu Junhua, director, Hong Kong Office, Japan Research Institute. Diamond, September 23, 2000.