The U.S. dollar soared against the yen Thursday after Standard & Poor's cut its rating on Japan's debt by one notch to AA minus from AA amid concerns over its increased borrowing.

The dollar spiked 0.8 per cent to 82.824 yen at mid-afternoon after trading as high as 83.20 yen.


A Tokyo shopper checks a jacket with a price at that time of $21 US in 2009. Japan has been gripped by deflation for months. ((Itsuo Inouye/Associated Press))

That's the same credit rating granted to emerging power China. Standard & Poor's had earlier put Japan — which is carrying the world's biggest debt load — on notice for a downgrade, but the scale of its criticism of Japan's efforts to get a grip on its debt surprised analysts.

It predicted Japan's budget deficit will remain high for the next few years and that the government will have difficulty getting it under control amid persistent deflation and a rapidly aging population.

The agency predicted that Japan's annual fiscal deficit will fall only modestly from an estimated 9.1 per cent of national income in the fiscal year 2010 to eight per cent in fiscal 2013.

"By tossing the scale of Japan's fiscal challenges under the spotlight, the S&P move shook investors' willingness to treat it as a safe haven," said Andrew Wilkinson, senior market analyst at Interactive Brokers.

Soaring debt load

Japan's national debt is nearly twice its annual economic output. Greece, which recently had to accept a bailout package from the IMF, had a ratio of roughly 140 per cent at the time. The U.S. ratio is near 100 per cent, while Canada's is in the 70 per cent range.

In Japan's case thus far, worry has been restrained because most of Japanese debt — 95.5 per cent — is held by domestic investors.

Indeed, that's historically bought the Japanese government a little leeway. "Japan's ability to pay is simply much stronger than the United States," University of Maryland business professor Peter Morici said.

"The Bank of Japan sits on $1 trillion in foreign currency reserves. It has more than enough cash flow and adequate reserves to service the claims of foreign creditors. The United States can hardly make such a claim," he said.

Morici says the United States, owner of a ballooning $1.5 trillion annual deficit, is more deserving of a downgrade from its pristine AAA rating — a move that would be sure to send shockwave through financial markets.

Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubish UFJ, said the Japanese downgrade "will certainly up the pressure on the government to become more pro-active in creating a long-term fiscal strategy."