Standard & Poor's maintains Japan's sovereign rating, warns that yen weakening could trigger a downgrade

S&P Global Ratings on Monday maintained its rating on Japan's sovereign debt, but stated that if the yen weakens further, it may downgrade the rating, reflecting a deterioration in Japan's economic competitiveness. The credit rating agency maintained Japan's A+/A-1 rating, reflecting its view that Japan's nominal GDP and income growth remain resilient in the face of geopolitical risks. However, the report noted that due to increasing investment and stimulus spending, Japan's fiscal deficit may widen over the next two years. S&P stated in a statement, "If Japan's economic growth continues to significantly lag behind other high-income economies and the yen weakens further, reflecting a continued deterioration in Japan's economic competitiveness, we may downgrade Japan's rating." After weakening for four consecutive trading days, the yen exchange rate fell to 160.46 earlier on Monday. Tensions in Iran pushed up oil prices and exacerbated inflation concerns, weighing down the yen and Japanese government bonds. Traders closely monitored the key level of 160, as authorities intervened near this level in 2024. Japan's top foreign exchange official stated that if the current situation persists, the government may take decisive action. Subsequently, the yen-to-dollar exchange rate rebounded below the closely watched level of 160. Bank of Japan Governor Haruhiko Kuroda then pointed out that exchange rate fluctuations have a significant impact on the economy and prices, leading to further increases in the yen. At the most recent policy meeting, amid uncertainties in the Middle East, the Bank of Japan decided to maintain its policy status quo but still retained the possibility of raising interest rates in April. Overnight index futures indicate that the market predicts a 70% probability of the Bank of Japan raising interest rates next month.