You sometimes really have to wonder what’s going through the heads of the people who do the analysis on large developed sovereigns for the ratings agencies. Today, for example, Fitch unleashed a downgrade on Japan which is hardly the first time Japan’s gotten dinged by a ratings agency and lived to tell the tale with interest rates lower than ever.

The basic problem is that while there are plenty of good reasons to be bearish on Japan, the country, there’s no reason to be bearish on Japan the issuer of yen-denominated debt. Now of course a sovereign can always do something weird like just refuse to pay what it owes. But to simply observe that an entity—the government of Japan—that is capable of producing infinite quantities of yen instaneously has a lot of yen denominated debt says absolutely nothing about the entity’s ability to pay those debts. Are holders of yen-denominated financial assets vulnerable to a sharp decline in the trade-weighted value of the yen? Yes they are. But that’s not a default. And there’s a strong case that Japan’s long-depressed and long-deflation-prone economy would benefit from a sustained decline in the yen driven by large-scale debt monetization.

For Japan to default, the political system would need to deliberately choose welching on its debts as a superior alternative to printing yen to pay them. I don’t know anything about Japanese politics, so maybe there’s some reason to think that choice would be made. But neither this Fitch note nor anything else I’ve read from the ratings agencies ever seems to make that case.

