S&P warns of possible economic blow, hit to Japan Inc from BOJ rate hike

BY Reuters | ECONOMIC | 02/09/23 04:23 AM EST

By Leika Kihara

TOKYO (Reuters) - A future Bank of Japan (BOJ) interest rate hike could affect the country's sovereign debt rating if firms struggle to absorb rising funding costs, an official at S&P Global Ratings said on Thursday.

Higher borrowing costs could also lead to a downturn in long-term economic growth, S&P said.

Japanese bond yields have crept up on market expectations the BOJ will phase out its yield control policy and start raising interest rates under a new governor who succeeds incumbent Haruhiko Kuroda in April.

While further rises in long-term interest rates could increase Japan's already large debt burden, such factors are already taken into account in the current "A+" sovereign debt rating, said Kim Eng Tan, senior director of S&P's sovereign ratings team in Asia-Pacific.

The bigger concern is whether Japanese firms, accustomed to many years of ultra-low interest rates, could absorb higher funding costs that come from tighter monetary policy, he told Reuters in an interview.

S&P expects the BOJ to tighten policy only gradually with the near-term impact on the economy likely limited, Tan added.

But the longer-term effect on Japanese firms and the broader economy is a concern as "we're now at a stage where interest rates seem to be rising, and there's quite a bit of uncertainty about how far it will go before it stabilises again," he said.

Even a 1-2 percentage point increase in interest rates would have a big impact on Japanese firms, particularly those in the service-sector with low profits or high debt, Tan said.

"They've been used to a very low interest rate environment for quite a while. So it is really the impact on the economy that could potentially have an impact on our ratings," he said.

S&P currently assigns an "A+" long-term and "A-1" short-term sovereign debt ratings on Japan. The outlook on the long-term rating is stable.

(Reporting by Leika Kihara; Editing by Kim Coghill)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.