Investing and Global Finance News

Not All National Downgrades Are So Terrible

Its interesting to see that after Moody’s downgraded Japan’s credit rating the world did not fall apart. Asian markets were trading a little lower and the price of gold went up, with many people in Asia buying physical gold. The American markets did not react dramatically to the downgrade like they did to the American Downgrade. Why?

First of all, Japans debt is mainly internal Japanese debt so other nations are less worried about losing their money. America is indebted to other countries that stand to lose tremendous amounts if America defaults.

In addition, Japan has already suffered downgrades in the past, the first being in 1998 when it lost its triple A status: life goes on. For America it was the first time. Also, the American Economy has been in a rocky situation and has been getting worse for years. In 2008, the bubble burst. Since then, America has been in a slow recessionary decline and each new decline is more threatening. Also Japan owns a lot of American debt which hopefully it can retrieve if it should need money. In contrast, America is already heavily in debt without any signs of repayment in the near future.

Japan had been a more stable economy but the unpredictable tsunami and the earthquake’s damage to nuclear reactors caused sever economic damage.
Moody’s also blamed Japan’s political instability that makes it difficult to pursue consistent economic policies to control its debt. Japan is going to elections soon to vote for the sixth Japanese leader within five years.

In short, the financial markets seem to view Moody’s Japan downgrade as more of an internal issue. Its ramifications on the world will be less pronounced than America’s downgrade because the American downgrade was the result of an economy with a $16 trillion debt with no foreseeable repayment in sight.

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