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Japan’s Ratings Outlook Cut on Lack of Hatoyama Plan

Jan. 26 (Bloomberg) — Japan’s sovereign credit rating outlook was lowered by Standard and Poor’s because of diminishing “flexibility” to cope with a swelling debt load and concern about the lack of a plan to rein in budget deficits.

Policies set out by Prime Minister Yukio Hatoyama’s government “point to a slower pace of fiscal consolidation than we had previously expected,” S&P said in a statement today. Japan’s rating could be cut if the government fails to come up with measures to spur growth and economic growth remains limited, the firm said.

Today’s move was the first cut to the outlook or rating for Japan’s debt by S&P since 2002, and highlights concerns that the world’s largest debt load will lead to higher borrowing costs. The yield on Japan’s benchmark 10-year notes is 1.32 percent, more than 2 percentage points lower than U.S. Treasuries with a comparable maturity. The yen pared gains after the release.

“Should the change in outlook spur people to start seriously doubting Japan’s fiscal health, yields on long-term government bonds will climb,” said Hiroshi Morikawa, a senior strategist at MU Investments Co., which manages $13 billion in Tokyo. “That will not only limit the government’s fiscal stimulus measures but will also boost borrowing costs, deterring companies from investment.”

The yen was little changed at 90.22 per dollar as of 4:27 p.m. in Tokyo after advancing as much as 0.8 percent earlier today.

Bond yields rose yesterday after the government said nation’s debt will probably swell to 973 trillion yen ($10.8 trillion) by the end of the 2010 fiscal year, 8 percent more than the estimated 900 trillion yen for the year ending March 31.

Hatoyama is planning to sell 44.3 trillion yen in bonds to fund his record budget proposal, the most ever and an amount that could increase if the nation’s recovery slows or tax receipts slide.