International financial markets responded immediately to the downgrading. The downgrading was linked to the US', but compared to the US, the fall of Japan's credit rating had a more limited influence on markets around the world.

There are several reasons for this. First, the coverage of the Japanese economy is relatively limited, and the internationalization of the yen is still low.

Second, the international market is already quite familiar with Japan's fiscal situation, so the lowering of its credit rating will not have an immediate impact on financial markets.

Third, since S&P and Fitch had already lowered their rating for Japan's debt, Moody's action just echoes those two institutions. Therefore, any response from the exchange market or Japanese debt market to the Moody's rating will be temporary.

Meanwhile, Japanese national debt is relatively safe, meaning a debt crisis is unlikely.

Recently, due to the exposed debt problems of the US and European countries, the sovereign credit ratings of the US and Greece have been lowered. While the instability of its exterior economy increases, Japan's national debt will continue to act as a safe investment for those seeking risk aversion. It is, in fact, a relatively safer bond to hold compared to those of the US and Europe.

There are three reasons for this.

First, in recent years, 95 per cent of the rise in Japan's national debt was bought by Japanese citizens, which differs greatly from the situation in Europe. Most of the debt of European countries like Greece was bought by foreign investors, who face a greater risk as the international financial crisis has not yet wound up. To some extent, Japan will not suffer from the same debt crisis Europe did.

Second, the return on Japanese debt bonds is relatively high. Bank of America Merrill Lynch data show that in April the average rate of return on long-term Japanese bonds reached 2.2 percent, while the average rate of return for the whole bond market was only 1 percent.

Third, Japan distinguishes itself from other developed countries in its high individual deposit rate, and therefore the government does not have much concern when issuing national debt bonds.

The author is the director of the Department for World Economy and Development Studies at the China Institute of International Studies.

(China Daily 09/03/2011 page5)