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Japan downgrade 'unlikely to be last' of developed nations, Aberdeen warns

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  • Japan downgrade 'unlikely to be last' of developed nations, Aberdeen warns

GLOBAL - Investors have warned that Japan's downgrade by Moody's will only serve to exacerbate concerns over the finances of European developed nations, despite assurances by the ratings agency that the countries' outlook remained stable.

Concluding a review of Japan's rating launched in late May, Moody's said a combination of changing governments and the recent earthquake, ensuing tsunami and Fukushima crisis had delayed recovery from the global financial crisis, with a budget surplus now not predicted to occur until 2020 - eight years later than initially targeted.

The agency, however, stressed that its belief in a stable outlook was supported by the "undiminished" bias of Japanese investors for domestic government bonds, which allowed the government to fund its fiscal deficits at the lowest nominal rates globally.

Explaining the downgrade to an Aa3 rating, Moody's said: "This funding cost advantage will be sustained by considerable institutional and structural strengths, which will prevail even with large budget deficits in 2011 and 2012."

However, Anthony Michael, Aberdeen Asset Management's head of fixed income for the Asia Pacific region, warned that the downgrade would only serve to fuel concerns in the euro-zone about sovereign debt.

Michael said Japan's downgrade was "not surprising" in light of its fiscal position, but he argued that it followed on from Standard & Poor's recent downgrade of US T-bonds, as well as uncertainty surrounding Italy, Spain and France.

"This move is likely to continue to add to investor concerns over the state of the developed world's sovereign finances," he said.

"Indeed, this downgrade is unlikely to be the last among so-called developed market countries, the majority of which to varying degrees are suffering from huge deficits."

However, Clive Lennox, head of foreign exchange trading, stressed that currency markets were "little moved", displaying an "indifferent reaction" to the announcement.

The downgrade comes at a time of political uncertainty in Japan, with prime minister Naoto Kan facing leadership challenges from several members within his cabinet.

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