BOJ rate hike could have a negative impact on ratings

A future Bank of Japan BOJ interest rate hike could affect the country's sovereign debt rating if firms can't cope with rising funding costs, an official at S&P Global Ratings said on Thursday.

In the future, a downturn in long-term economic growth could be caused by higher borrowing costs, according to S&P.

Japanese bond yields have crept up on market expectations that the BOJ will phase out its yield control policy and raise interest rates under a new governor who replaces incumbent Haruhiko Kuroda in April.

According to Kim Eng Tan, senior director of S&P's sovereign ratings team in Asia-Pacific, said that further rises in long-term interest rates could increase Japan's already large debt burden, but such factors are already taken into account in the current A sovereign debt rating.

He told Reuters in an interview that Japanese firms, accustomed to many years of ultra-low interest rates, could absorb higher funding costs that come from tighter monetary policy.

S&P expects the BOJ to tighten policy gradually, with the near-term impact on the economy likely to be limited, Tan said.

There's a lot of uncertainty about how far it will go before it stabilises again, and there's a concern about the longer-term effects on Japanese firms and the broader economy.

Even a 1 -- 2 percentage point increase in interest rates would have a big impact on Japanese firms, particularly those in the service sector with low profits or high debt, Tan said.

They've been used to a very low interest rate environment for quite a while. He said that the impact on the economy could potentially have an impact on our ratings.

S&P currently assigns an A long-term and A-1 short-term debt ratings on Japan. The outlook on the long-term rating is stable.