A comparative snapshot of the ECR scores of Japan and China shows that risk differentials between the two countries have narrowed by only five ECR points during the last 10 years, highlighting the steady convergence in both countries risk profiles since 2002.
With a global rank of 39, China rose by only eight places in the ECR global rankings since March 2002. In stark contrast, Japan plummeted 19 places during the same period, meaning China and Japans positions in the rankings have converged by 31 places over this period.
Japans fall is underpinned by deteriorating economic conditions owing to a hefty debt burden and an economy characterized by stagflation and a demographic shock.
Japans economic assessment score fell by 2.1 points year/year to 50.3 (out of 100), while the countrys structural assessment score is now just 65.9.
Gross public debt exceeded 200% of GDP in 2009 and is projected to reach around 240% of GDP by the end of next year. Japan will need additional reforms to its pension system, for example without which the country might be facing a credit shock. All of these concerns are borne out by its fall in the rankings.
Three of Japans economic sub-factors were downgraded last year, led by the bank-stability risk indicator, highlighting concerns about balance-sheet strengths. Yet the economic-GNP outlook and government-finances indicators are the lowest scorers, at 4.0 and 3.1 (out of 10) respectively, testament to the countrys lack of growth and high debt levels.
Although Japans position in the ECR rankings has plummeted to its lowest level since ECR began its survey in 1993, there are signs that optimism might be creeping back into analysts perceptions, after prime minister Shinzo Abe swept to victory in the December election.
Japan benefited from improvements in the countrys political assessment in Q4, improving by 0.2 points.
Meanwhile, the countrys economic assessment increased by 0.3 points, due to an advancement of the countrys monetary policy indicator, which improved by 0.1 point, suggesting analysts believe that Abes policies to reduce real interest rates and devalue the yen will kick-start growth.
However, Japan has a long way to go in regaining its past position in the ECR rankings. On the other hand, more bullish forecasts this quarter suggests Abe is at the right starting point and could lead Japan to the status it once claimed.
This article was originally published by Euromoney Country Risk. To find out more, register for a free trial at Euromoney Country Risk