Jon Gordon: As Japan deals with the aftermath of a tragic earthquake, one key question is – how will it finance the reconstruction? We’re joined now by Moody’s Asia Pacific Head of Sovereign Ratings Tom Byrne in Singapore for his views. Tom, at least initially, you saw the earthquake’s impact on Japan’s fiscal position as temporary but at what threshold would new spending make you uncomfortable here?
Tom Byrne: Well, I mean, first of all, we’re still trying to assess the damage. I mean, the Japanese government officials are trying to assess the damage but as time goes by, it seems to be the economic consequences, the economic effects seem to be greater than perhaps originally expected back on Friday afternoon. There were ripple effects that will probably spread through the Tokyo metropolitan area even though the earthquake didn’t happen there.
That being said, we’re using the 1995 Kobe earthquake as a benchmark which was the largest natural disaster in Japan post-World War II history. Prime Minister Kan said this, the Friday earthquake will be the largest, larger than Kobe. Kobe’s effect was about 2%-2.5% on GDP for economic costs, fiscal cost were a bit less, somewhere between 1%-1.5% of GDP, according to the OECD statistics. So that’s our benchmark and it will be spread over a multi-year period. If that’s the cost, probably the JGB [Japanese government bond] market can absorb that without much dislocation.
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Jon Gordon: Right. And now, turning back to that, with the Kobe quake. At the time you guys didn’t take any action on ratings then, if we see spending ramp up beyond the expected threshold here, I mean what’s the threshold for you to take a look at your ratings now?
Tom Byrne: Well, one of the key indicators we’ll be looking at is whether the domestic JGB market, how sensitive that is to the extra demand for government funds. We’ve seen a lot of stability in the JGB market since the global financial crisis. Perhaps that will continue. I think it should also, it’s also worth noting that Japan has a very large external assets. The country as a whole, some of which can be repatriated. It’s share of GDP, it’s 59% which is the largest of any advanced country. That’s 59% of net external assets. Germany is much less. Germany is another larger one. And so, these are additional funds. We’re also trying to assess not just the bottom line and the Dollar amount, economic cost, and fiscal cost, but the burden sharing and whether this will be mostly borne by public funds, private insurance, or reduction in private savings.
Jon Gordon: Touching on that, Tom. You know, one option that has been bandied about is the raising of taxes. Do you think that that would be an appropriate step?
Well, I would say the government is looking at all options to deal with this crisis. All right. Okay, well, just turning to debt issuance, do you think will see a major increase in that in terms of the Yen figure?
And how [will] that affect your stance on Japan?
Tom Byrne: Well, again, we’re you know, it’s very early and in this game, we tried to assess the actual amount of damages. I would say that the government’s target of 44 trillion in new JGB issuance will be hard to keep this year because of the earthquake.
How much higher than that could we end up? We don’t know yet.
How would that impact the ratings? Well, I mean, if it’s, this is what we really, our primary concern really is that you know, the earthquake has, the ruling party and the opposition party has shown unanimity, a sense of urgency in dealing with this crisis. And if they could show the same amount of consensus and sense of urgency in dealing with the long-term fiscal crisis, that would help support the rating.