S&P Keeps Japan Rating at A+/A-1 but Flags Further Yen Weakness as a Trigger for Downgrade

S&P Global Ratings on Monday maintained its A+/A-1 rating on Japan's sovereign debt, saying its decision reflects a view that nominal gross domestic product and revenue growth in Japan will remain resilient in the face of geopolitical risk.

At the same time, the ratings firm emphasized vulnerabilities that could prompt a change in its assessment. In particular, S&P said it "may lower the ratings on Japan if economic growth is persistently and significantly below that of other high-income economies, and if the yen weakens much further, reflecting a persistent deterioration of Japanese economic competitiveness."

The agency also noted fiscal pressures ahead. S&P said Japan's fiscal deficit could widen over the next two years, citing higher spending on investment and stimulus as the principal drivers of that change. The firm linked those spending prospects to an expectation that government outlays will increase, which could put additional strain on public finances.

The reaffirmation rests on S&P's judgment that nominal GDP and revenue growth will provide a buffer even as geopolitical risks persist. However, the firm placed explicit emphasis on two conditions that would lead it to reconsider the rating: a sustained underperformance of Japan's economy versus peer high-income countries, and a further pronounced weakening of the yen tied to a lasting decline in competitiveness.

While the rating action is an affirmation, the statement from S&P introduces clear contingencies. The firm presented a scenario in which currency dynamics and relative growth trajectories together could alter its view of Japan's creditworthiness. It also highlighted the fiscal outlook, stating the potential for a wider deficit driven by investment and stimulus spending over the coming two years.

What this means

• S&P has kept Japan's sovereign rating at A+/A-1 based on its assessment of resilient nominal GDP and revenue growth.
• The ratings agency warned it may downgrade if Japan's growth lags persistently and significantly behind other high-income economies or if the yen weakens materially, signaling deteriorating competitiveness.
• S&P expects the fiscal deficit could widen over the next two years because of higher investment and stimulus spending.