Japan’s downgrade: Why no one seems to care

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Japan's already less-than-sterling credit rating took another hit from Fitch's downgrade Monday, but the country's bonds and currency are likely to remain impervious to the blow.

"The Bank of Japan has a very aggressive bond buying program which can offset a lot of other things," said Marcel Thieliant, a Japan economist at Capital Economics. "For the foreseeable future, I don't think it has any practical consequences."

In April of 2013, the Bank of Japan launched a massive quantitative easing program, which was later expanded to purchase 80 trillion yen worth of assets a year, as a part of Abenomics – a series of policy measures unveiled under Prime Minister Shinzo Abe to jump start the economy.

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The yen weakened after Fitch announced it downgraded Japan's credit rating to A from A+, with the U.S. dollar fetching 119.42 yen after the news from around 118.88 yen before. But the Japanese currency quickly recovered, with the greenback fetching around 119.11 yen in Asian trade Tuesday.

The yield on the 10-year Japanese government bond (JGB) moved slightly higher to around 0.311 percent from 0.307 percent before the announcement, although that's not out of line with recent daily moves. Bond yields move inversely to prices.

Fitch's downgrade is only the most recent rating action that the markets have shrugged off; in December, Moody's Investors Service cut Japan's rating to A1, equivalent to one level above Fitch's rating, citing similar reasons.

But despite a generally skeptical outlook over Japan's relatively high debt load and fiscal deficits as well as the government's moves to delay a sales tax hike and cut corporate taxes, betting that JGBs would fall has been a "widow-maker" trade for a decade as low interest rates kept money parked there.

The yen's safe-haven status also doesn't appear to face much of a threat in the near term, largely because that's not based on expectations the government books will balance anytime soon.

The country has a large gross foreign asset balance – 797 trillion yen at the end of 2013, according to data from the Finance Ministry. The country's retail investors, often referred to as mythic housewife Mrs. Watanabe, may dabble at offshore investments, but when they become nervous, they quickly bring that money home.

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So the impact of the rating downgrade, "normally a currency-weakening factor, is mixed with the unique yen factor of 'risk-off' strength," Bank of America-Merrill Lynch strategists said in a note Monday.

But that could change, they said.

"Japan's fiscal state leaves little room for a sense of security," the strategists said. "The aging population can lead to lower current account balance, and should the public debt keep rising without a clear and credible path for fiscal discipline, the yen's safe haven status could be undermined."

Fitch expects Japan's gross general government debt will rise to 244 percent of gross domestic product (GDP) by the end of this year, noting it's the highest ratio of any rated sovereign. That's somewhat offset by the government's financial assets, including foreign reserves, worth around 113 percent of GDP at the end of 2014, it noted.

There's another reason the rating cut didn't have much impact: no one's surprised.

"We know Japan has large debt, a large deficit and a delayed consumption tax," Thieliant said. "There's no new information. If anything, the economy is weaker than many had expected, but that by itself won't change the debt dynamics very much."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1