Earlier today rating agency Fitch affirmed its rating for Japan's long-term foreign currency rating, at ‘A’. The rating agency did however revise its outlook from stable to negative saying: “The coronavirus pandemic has caused a sharp economic contraction in Japan, despite the country's early success in containing the virus”. The statement added: “Sharply wider fiscal deficits in 2020 and 2021, as we project, will add significantly to Japan’s public debt, which even before the pandemic was the highest among Fitch-rated sovereigns as a share of GDP”. In its review last month S&P revised its outlook on the country’s A+ rating to stable from positive. And over the weekend Moody’s concluded its review of the nation, with no change to the A, stable, rating.
The report had little impact on the yen. However, the country’s currency, considered a safe haven, has appreciated to a four-month high against the dollar (breaking through 105, at time of writing) amid the recent risk-off sentiment. Japanese policymakers may have to intervene if the yen continues to appreciate and test the BoJ’s tolerance levels. In terms of growth, the Nikkei business daily reported that the Japanese government has forecast that the nation’s GDP could contract by 4.5% in fy 2020/21, down from pre-virus estimates of +1.4% growth. It has also been reported that the government is to offer fresh guidelines on the required response to the coronavirus outbreak, to local governments and businesses; through the use of a three-stage categorisation process. A virus panel is scheduled to discuss a proposal with experts on Friday.
Elsewhere, yesterday the Fed extended seven of its nine emergency lending facilities. The total loans outstanding amount to ~USD100bn, although the facilities have the capacity to inject trillions of dollars worth of liquidity. A statement from the central bank said: “The three-month extension will facilitate planning by potential facility participants and provide certainty that the facilities will continue to be available to help the economy recover from the Covid-19 pandemic”.
Market focus will remain on the Fed as the two-day FOMC meeting concludes later today; no change to the Fed Funds rate is expected. However, as the US struggles to contain the Covid-19 outbreak and US-China tension remain, there may be a dovish tilt to overall rhetoric. Powell is expected to reiterate the Fed’s willingness to do whatever it takes to support a US recovery. He may also call on Congress for further fiscal support; a USD 1tn aid package is currently being hammered out. The dollar has continued its retreat this morning; the DXY index has breached the 94 level and could see the worst monthly performance in a decade.