The Bank of Japan’s plan to purchase shares held by banks as a means of stabilizing the financial system has neutral implications for the credit ratings of major Japanese banks, Fitch Ratings said Friday.
Fitch added that the central bank’s plan has no immediate implications for Japan’s sovereign ratings.
The initiative “appears to reflect a more realistic stance to the severity of the banking sector’s problems and as such may be a welcome prod to the government to take more decisive measures to deal with the bad loans of the banks and other problems in the financial system,” Fitch said.
The implications for the ratings of banks are neutral, however, as Fitch’s investment grade debt ratings are sustained on the premise that government support would be forthcoming, whenever needed, and the BOJ’s initiative is viewed as a proxy for direct support from the government.
“The initiative’s most significant plus for the banks is that it would mitigate erosion of their capital due to falling stock prices,” the agency said. Banks must deduct 60 percent of appraisal losses on investment securities holdings from their core capital.
According to Fitch’s estimate, the capital adequacy ratio of major banks would fall below 4 percent if the key Tokyo Stock Price Index were to fall to 700. The Topix closed Friday at 926.78, down 16.38 points from the previous day.
Regarding sovereign rating implications, Fitch said it has been encouraged by the BOJ’s emphasis on the need for accelerated corporate restructuring.
But “such an unconditional bailout scheme would, by itself, do little to improve the fundamental health of the economy or the financial sector,” the agency said.
In the absence of followup policy action aimed at resolving the banks’ bad-loan problems, the stock-purchase scheme will act as “little more than a short-term palliative” for the economy, it added.
“Only if the announcement is a harbinger of a more concerted approach to financial restructuring and a clearer recognition of the true extent of the bad-loan problem than hitherto seen, would it be viewed positively from a sovereign risk perspective,” Fitch said.
Fitch’s long-term sovereign rating for Japan stands at AA with a negative outlook.
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