Japan’s Downgrade based on the wrong reasons?

The following appeared in today’s WSJ – “Moody’s Investors Service downgraded Japan’s credit rating Monday, highlighting the challenges facing Prime Minister Shinzo Abe as he tries to stoke inflation and growth.

In explaining its move, Moody’s cited heightened uncertainty over Japan’s ability to cut its fiscal deficit after Mr. Abe decided last month to delay an increase in the national sales tax scheduled to take effect next year.”

Given Japan has a fiat currency (yen), the deficit is not an issue, provided that the easy money policies necessary to get the economy going doesn’t stoke too much inflation. Clearly the growth in Japan’s debt hasn’t proven an issue to date. Japan has other issues, such as an aging population, that will keep demand for goods and services below historic levels, and if demand remains muted, so will both growth and inflation.

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