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Finance

Moody's downgrades Japanese banks groaning with government bonds

TOKYO -- Seven financial institutions holding large amounts of Japanese government bonds have been downgraded by Moody's Investors Service, a day after the country's sovereign bond rating was lowered.

     Five commercial banks, including Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corp., were dropped a notch to A1, along with two life insurers -- Nippon Life Insurance and Sony Life Insurance. The ratings of two government-affiliated financial institutions were cut as well.

     The rating cut on Japan's sovereign debt led to the reduction, as these institutions would likely receive government support in case of a financial crisis.

     But with the Bank of Japan continuing to buy massive amounts of JGBs for monetary easing, long-term interest rates are being kept low, and domestic financial institutions that hold a significant chunk of JGBs are also unlikely to unload them on concern about the country's fiscal health.

     Consequently, interest rates on debt issued by banks, which are set by adding a premium on JGB yields, are not likely to rise sharply.

     Despite the downgrade, the A1 rating is still deemed investment-grade as defined by Moody's. "Earnings at Japanese banks are solid, and their creditworthiness will likely stay stable," said Naoko Nemoto, an analyst at Standard & Poor's.

     But with the delayed sales tax hike, the potential for an interest rate increase is growing steadily, says Mana Nakazora at BNP Paribas Securities in Japan.

     Foreign investors are growing more concerned about the possibility that Japan's fiscal standing may worsen. The annual premium on credit default swaps covering Japanese debt has reached a year-to-date high of 0.58%.

(Nikkei)

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