Downgrading setback for Japan

JAPAN'S tardy progress in putting its financial house in order earned it a credit downgrading today. As the government approved a secondary budget in another bid to boost the economy, ratings agency Fitch IBCA, Duff & Phelps criticised its performance and warned that vain attempts to spend its way out of the current depression would only put it deeper in debt.

Fitch has lowered its rating from AA-plus to AA, making government borrowing more expensive. The agency said unless the government exercised restraint, its debt could grow from its current 130% of gross domestic product to 150% by the end of next year - the highest of any country in the Organisation for Economic Co-operation and Development.

Japan's government, led by an increasingly besieged Prime Minister Junichiro Koizumi, was accused by Fitch of not facing up to the country's problems, despite a string of recent official statements admitting that the country had sunk into its fourth recession in a decade.

International investors are watching for possible downgrades by Moody's and Standard & Poor's. These could reduce Japan's overall debt rating close to an embarrassing single A.