Bank of Japan policy change may lead to a revision of the country's credit rating

S&P Global Ratings said the BOJ's policy could be a crucial element in determining a country's creditworthiness. The rating agency believes that the actions of the central bank may lead to a change in the sovereign credit rating.

Kim Eng Tan, Japan's chief credit analyst, said the risks of a policy change or no policy change are quite high at the moment. The analyst also says that this is an important factor that can determine the rating triggers. 

There is a speculation that the BOJ may begin to cut back its monetary stimulus. The reason for this could be the fall of the yen, which in turn will lead to an acceleration of inflation.

Debate has focused on whether the central bank should hold firm to eliminate the threat of a return of deflation or start tightening the spigot to control rising prices.

Tan refrained from discussing what the Bank of Japan should do. However, he noted that for Japan's sovereign ratings, the risk of lower prices is more serious compared to the risk of their increase.

In his opinion, the increase in the likelihood of both deflation and inflation risks depends on the actions of the Bank of Japan.

The last time S&P changed Japan's credit rating was in 2015, downgrading it to A+. Thus, the agency expressed doubts about Prime Minister Shinzo Abe’s plans to restore economic growth. In 2022, the agency decided not to change this rating, but predicted that the country's creditworthiness would be stable.

According to the analyst, the depreciation of the yen could have a positive impact on government revenues, as it helps to increase corporate income and, also, tax payments.

Kim Eng Tan said that the risk of a sudden recovery in the yen as a result of changing expectations is one of the key issues at the moment. He also added that a sudden recovery in the yen may entail additional risks.