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. Last Updated: 07/27/2016

Japan Cuts Spending as Moody's Downgrades

TOKYO -- Prime Minister Junichiro Koizumi's government laid out guidelines for Japan's fiscal 2002-03 budget Tuesday amid a torrent of reminders about the nation's tattered public finances, including yet another credit rating downgrade.

The government itself warned in its annual economic white paper published earlier in the day that its finances could collapse unless it got its debt under control and tough reforms were implemented.

Japan's fiscal policy is complicated by the need to cut spending and at the same time lift the economy out of a decade-long stagnation to reduce debt -- already the worst in the industrial world -- and Koizumi said the budget for the year starting in April was aimed at achieving that through reform.

"The budget guidelines for fiscal 2002 agreed upon today will be the basis for us to materialize structural reform, which the Koizumi administration has been pursuing," the prime minister said in a statement.

If Koizumi needed a reminder of the need to fix the fiscal mess, Moody's Investors Service provided it by becoming the third international debt ratings agency to downgrade Japan's sovereign debt in less than two weeks, shaving its yen-denominated debt rating by one notch to Aa3 and keeping its outlook on the ratings negative.

Financial markets took the downgrade news in stride, but analysts said that did not mean the picture was any brighter.

"This is going to be problematic for many foreign investors because the downgrade is something they had feared," said Tomoko Fujii, economist at Nikko Salomon Smith Barney.

The yen briefly dipped but was largely steady at around 124 to the dollar as most traders and analysts had widely expected a Moody's downgrade.

The Nikkei average of 225 stocks ended up 0.79 percent at 10,452.65.

The downgrade came just hours after the government said Japan's finances could collapse if it kept up a vicious cycle of issuing new debt just to pay the servicing costs on its current debt, which now totals 666 trillion yen ($5.4 trillion) -- or almost 130 percent of gross domestic product.

In the white paper, the government said Japan's prospects could be better late next year if reforms were pushed through. Japan could see a modest economic recovery in the second half of 2002, and this could strengthen over the longer term into growth of 2 percent if reforms that have been a mantra for the Koizumi administration were in place, the white paper said.

The budget guidelines call for a 10 percent cut in public works spending -- a serious threat to many politicians within his dominant Liberal Democratic Party who have long relied on bringing such spending to their constituencies to win votes.

In all, Koizumi aims to cut 5 trillion yen in spending, but earmark 2 trillion yen in extra outlays for areas deemed important for structural reforms.

According to Japanese media, the general budget for 2002-03 was likely to shrink to about 82 trillion yen ($660.8 billion) from an initial budget of 82.7 trillion this year.