Tokyo-based media recently met with rare opportunities to hear countering views on how credit-rating agencies operate and how they should operate, when officials from Moody’s Investors Service defended their business and the head of a Japanese research institute detailed how it “rated” such agencies.
The Moody’s officials spoke at a luncheon Friday at the Foreign Correspondents’ Club of Japan, while the head of the Japan Center for International Finance explained its December report at the club Tuesday.
Rating agencies, particularly U.S. firms such as New York-based Moody’s and Standard & Poor’s, have come under intense scrutiny in recent years as their ratings — upgrading and downgrading bonds and debentures issued by firms and governments — have come to influence the market significantly.
In Japan, the downgrading in recent years of many Japanese firms has damaged their reputation in and outside of Japan. Most recently, when Moody’s lowered its ratings of securities issued or guaranteed by the Japanese government to Aa1 from the highest rating standard of Aaa in November, it sent shock waves across Japan and ignited calls within the country to question the validity of rating agencies.
Tomomitsu Oba, a former vice finance minister for international affairs who now heads the Japan Center for International Finance, said at the FCCJ luncheon that Japanese corporations regard the opinions of the rating agencies — which are privately run — too seriously.
The analysis of credit risks is merely “reference material,” not an authoritative indicator of economic health, Oba said. The use of the word “agency” gives people the wrong impression that these private entities are somewhat public, he added. “I thought I must correct that attitude (among firms),” Oba said.
He also criticized so-called unsolicited ratings given by some rating agencies such as Moody’s and S&P.
Unsolicited ratings, in which rating companies rate a firm’s bonds and debentures without request, should be differentiated from “solicited ratings,” in which ratings are requested and paid for. Oba cited results of his institute’s survey, in which many firms said they feel rating agencies are trying to increase their revenues from solicited ratings by giving unfavorable ratings to those firms who don’t request them.
Meanwhile, Masaru Kakutani, representative director of Moody’s Japan K.K., said during Friday’s luncheon that the two — solicited or unsolicited — need not be differentiated because the agency applies the same rating technique. He also said that rating analysts are transferred among various regions to maintain a geographically universal rating standard.
Vincent Truglia, cohead of the sovereign risk unit of Moody’s, also explained at the same luncheon it’s possible that the rating of Japanese government bonds could fall further in the next one or two years.
He cited as one factor the rising public-sector debt in Japan, seen reaching about 110 percent of gross domestic product by March this year and approaching 140 percent of GDP within two or three years. “These numbers have never been witnessed ever before in any industrialized country, or even emerging market country, in history,” he said. “So Japan will be entering upon some interesting new horizons regarding public-sector debt.”
However, Truglia dismissed notions that the Japanese economy is facing an imminent crisis. “Does it mean there is a crisis around the corner? No. But does it mean that the country, from our point of view, is Aaa? We’ve come to the conclusion, no.”