13 February 2002, 09:32 Japan rating review anticipated by market, rise in yields seen limited - HSBC
TOKYO (AFX-ASIA) - The move by Moody's to place Japan's domestic
sovereign rating on review for possible downgrade had been largely
anticipated by financial markets, HSBC Securities Japan senior
economist Peter Morgan said.
The agency said it may downgrade the Aa3 rating by as much as two
notches, adding that deflation is exacerbating the government's serious
debt problem.
"The longer it takes for the government to fashion an effective
policy response to deflation, the more complicated solving other
economic problems becomes," Moody's said.
However, HSBC's Morgan said the review has long been expected, with
bond yields rising sharply in recent weeks on reported or rumoured
downgrades.
The Nikkei Financial Daily said this morning that Standard and
Poor's could in principle downgrade Japan's sovereign rating at an
earlier stage than previously assumed, but the markets largely ignored
the news.
"I think that this was expected at this stage," Morgan said, adding
that an eventual downgrade by both S&P and Moody's has, "in absence of
any reason not to," been accepted by the markets.
The expected downgrade by Moody's is most significant for bonds as
it would take Japan to single-A status, forcing some foreign banks to
sell bonds ahead of the launch of new Bank for International
Settlements risk-management rules.
Single-A rated bonds will carry a 20-pct risk weighting, increasing
the level of reserves banks need to hold as cover for these assets.
The new rules will be introduced in 2004 but banks are expected to
prepare their balance sheets ahead of this deadline.
"Some would have to cut bond holdings ... though foreigners have
already been selling JGBs," Morgan said, adding that combined foreign
holdings may have reached a mere 4 pct of all issues.
The relatively small level of foreign-held bonds also provides
protection for the Japanese government bond market, as local investors
are unlikely to sharply offload their holdings, given a lack of
investment alternatives.
Domestic investors are also expected to be exempt from the new BIS
rules, which do not apply to institutions' holdings of bonds from their
own country, as money can always be printed to pay off domestic
bondholders.
"We are looking for yields to rise to around 1.6 pct this year,"
from 1.5 pct currently, Morgan said, noting that huge holdings by
domestic players, including government institutions, will prevent a
sharp spike in rates.
Morgan also questioned what he considers aggressive downgrades by
rating agencies, adding that they may be hoping to push the government
on structural reform more than considering the real possibility of a
default.
"Basically, there are huge savings and Japan is still the world's
largest creditor nation. Do they mean there is a likelihood of default?
"They have been very much focused on reforms. If they believe there
is some effect on that, it may be some motivation," he said, but added:
"I'm not sure it does have any effect."
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