Downgrade of Credit Rating for U.S. Govt Bonds: Grave Warning Urges Washington to Pursue Fiscal Consolidation

Editorial

14:53 JST, May 20, 2025

If the U.S. government debt continues to increase at the current rate, it will have a negative impact not only on the United States but on the world as well. The United States should take the downgrade of the credit rating for U.S. government bonds as a serious warning and devise a road map for fiscal consolidation.

Moody’s Ratings, a major U.S. credit ratings agency, has downgraded the credit rating for long-term U.S. Treasury bonds by one notch from the highest “Aaa” to “Aa1.” This means that U.S. Treasury bonds have now lost their top ratings with all three major global agencies.

U.S. Treasury bonds are one of the most trusted investment destinations among countries, corporations and other entities around the world, and they are also held as assets in foreign currency reserves.

Japan holds over $1.1 trillion (about ¥160 trillion) in U.S. Treasury bonds, making it the world’s largest holder of such bonds by country. If confidence in U.S. Treasury bonds were to waver, it would have a major impact on international financial markets, and the effect on Japan would be enormous.

Under the international financial order, which is centered on the dollar as the key currency, the United States has a responsibility to protect the credibility of its government bonds and the dollar. The recent downgrade of the credit rating must be an opportunity for Washington to reaffirm the importance of this responsibility.

As reasons for the downgrade, Moody’s cited such factors as the fact that debt and interest expenses have ballooned rapidly and that a fiscal bill currently under consideration by Congress is unlikely to significantly reduce the nation’s fiscal deficit.

This is natural reasoning, given the current situation in which there are deep divisions between the Republican Party and the Democratic Party, and momentum for fiscal consolidation is not strong.

Fiscal conditions have seriously deteriorated. In fiscal 2024 from October 2023 to September 2024 under the administration of former U.S. President Joe Biden, interest payments exceeded $1 trillion for the first time. The fiscal deficit amounted to about $1.8 trillion, the largest ever except during times of crisis, such as the COVID-19 pandemic. The outstanding debt amounted to $36 trillion.

In addition, the high tariff measures implemented by the administration of U.S. President Donald Trump have seriously undermined confidence in the United States, a situation that has exacerbated the negative impact on its fiscal conditions.

This is because other countries are said to be moving to shift investments to nations other than the United States. If other countries move away from U.S. Treasury bonds, the cost of interest payments will further balloon, putting pressure on the nation’s fiscal conditions. The United States needs to work on fiscal consolidation and at the same time change Trump’s tariff policy to a realistic path.

Meanwhile, not many people expect an imminent downgrade of the credit rating for Japanese government bonds. This is because Japan has given a certain degree of consideration to fiscal discipline, even though its government debt is at the worst level among the developed countries.

However, in Japan, there is active debate over consumption tax rate cuts as a measure to deal with high prices and U.S. tariff measures. If the government pushes ahead with consumption tax rate cuts without the financial resources to back them up, confidence in its fiscal management will be shaken.

If the credit rating of Japanese government bonds is downgraded, there are concerns that the economy will be disrupted, including an increase in corporate costs to procure funds. This is a risk that should not be forgotten.

(From The Yomiuri Shimbun, May 20, 2025)