While Japan’s emergency economic package announced Friday is a positive step, its immediate impact on bank credit ratings will be limited, Moody’s Investors Service Inc. said Monday.
“The plan fails to address the true scale of Japanese banks’ problem assets and it is too soon to conclude if the schemes presented in the package will lead to the banking system’s fundamental recovery,” the U.S. credit rating agency said.
Japan’s new economic package set a two-year deadline for major banks to dispose of bad loans along with a proposal to set up a government-backed mechanism to buy bank-held company shares.
According to Moody’s analysts, the package did not address some risks that may prevail in the future, including “temporary confusion and discomfort among banks and borrowers, and corresponding sales of bank shares held by borrowers” that may lead to downward pressure on Japanese stocks.
Another risk is that Japanese banks would put proceeds from sales of cross-held shares into government bonds, as domestic lending opportunities at present are limited, it said.
That would raise the banks’ already high bond portfolios, and make their sensitivity to interest rate movements “substantial,” it added.
The package also places “an excessive emphasis on disposal of loans to bankrupt and substandard borrowers,” Moody’s said, adding that it is more important to focus on borrowers who may have problems later.
The package’s proposed rules for direct writeoffs of bad loans are essentially “an accounting matter” because banks have already indirectly written them off by accumulating reserves.
Moody’s said it “does not expect banks to take initiatives to dramatically increase provisions or direct writeoffs in the near term,” suggesting “the bottom-line picture for Japanese banks’ nonperforming loan problems will change very little, despite the introduction of new rules.”
But the agency said the new rules may have a short-term negative impact on borrowers because many rely primarily on bank lending.
“In an economy highly reliant upon financial intermediaries, a regulator-dictated bank credit reduction in an abrupt fashion may induce serious negative chain effects to the entire economic body,” it said.
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