Yen hit by S&P's downgrade of Japanese debt

[January 27, 2011]  LONDON (AP) -- The dollar spiked higher against the yen Thursday after a leading credit ratings agency downgraded its view on Japan's debt amid concerns over its elevated borrowings.

Stock markets mostly traded higher, however, after the U.S. Federal Reserve gave few, if any, indications that it is thinking about changing its policy anytime soon. That suggests interest rates will remain at historically low levels and that the central bank will continue its program to pump $600 billion into the U.S. economy -- a welcome combination for stock market investors.

But the main development in the markets Thursday was the news that Standard & Poor's cut its rating on Japan's debt by one notch to AA- from AA. Though the agency had Japan on notice for a downgrade, the scale of its criticism of Japan's efforts to get a grip on its debts was surprising. The dollar was trading 0.8 percent higher on the day at 82.89 yen after trading as high as 83.20 yen.

"In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics, in part due to the coalition having lost its majority in the upper house of parliament last summer," S&P said.

The agency projected that Japan's fiscal deficit will remain high for the next few years and that the government will have difficulty managing its debt amid persistent deflation and a rapidly aging population.

It is forecasting Japan's annual fiscal deficit will fall only modestly from an estimated 9.1 percent of national income in the fiscal year 2010 to 8 percent in fiscal 2013.

Japan's debts have raised eyebrows for many years and its cumulative national debt is nearly twice GDP.

However, they've not proved to be too much of a worry as most of the debt is held by domestic investors -- only around 4.5 percent of Japanese government bonds are held by foreigners.

Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubish UFJ, said the downgrade "will certainly up the pressure on the government to become more pro-active in creating a long-term fiscal strategy."

The downgrade had no impact on Asian stocks as it was released after markets closed. Japan's Nikkei 225 stock average closed 0.7 percent higher at 10,478.66 after the Finance Ministry announced that export growth had accelerated for the second straight month in December, indicating a revival of overseas demand.

Japan's debt issues have come to the surface at a time when concerns over Europe's debt crisis have diminished somewhat amid growing signs that policymakers have gotten a grip on the situation.

The underlying improvement in sentiment in Europe has buoyed the euro for much of January. By late morning London time, the euro was up a further 0.1 percent on the day at $1.3728, just shy of an earlier fresh two-month high of $1.3756.

European stocks were also well-supported, with Germany's DAX up 0.4 percent at 7,156 and the CAC-40 in France 0.1 percent firmer at 4,052. The FTSE 100 index of leading British shares was up 0.1 percent at 5,974.

Wall Street was poised for a fairly solid opening, though U.S. economic data could alter matters. Particularly important will be the weekly jobless claims figures as this is the week that the Labor Department collates its monthly nonfarm payrolls data, which are due to be published next Friday.

Dow futures were up 16 points at 11,952 while the broader Standard & Poor's 500 futures rose less than a point to 1,294.20.

Earlier in Asia, South Korea's Kospi added 0.2 percent to 2,115.01 while Hong Kong's Hang Seng fell 0.3 percent to 23,779.62.

The Shanghai Composite Index climbed 1.5 percent to 2,749.15, and the Shenzhen Composite Index for China's smaller, second market rose 1.8 percent to 1,174.67 after struggling to achieve gains earlier in the new year.

Investors have been nervously anticipating China's likely next step to dampen inflation -- namely a hike in interest rates ahead of the Lunar New Year holiday next week. They have hiked interest rates twice in the past four months and repeatedly tightened investment curbs to keep inflation from spreading throughout the economy.

Benchmark crude for March delivery was down 68 cents at $86.65 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

Pamela Sampson in Bangkok contributed to this report.

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