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To: yard_man who wrote (147626)	1/31/2002 6:52:15 PM
From: Haim R. Branisteanu	Read Replies (3) \| Respond to of 436258

DJ S&P's Gloomy Tone May Pave The Way For Japan Downgrade By John Parry Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--An especially gloomy analysis of Japan's banks and of credit quality in the country as a whole by ratings agency Standard & Poor's Thursday may well augur another sovereign downgrade, U.S.-based strategists say. "Japan's economic stagnation has evolved into a worrisome deflationary recession, with no signs of an upturn for the foreseeable future," S&P stated in a press release that was released earlier in Asian trading time. The ratings agency added that it expects credit quality in Japan to further deteriorate in 2002, "throughout essentially all sectors of the economy". The release said there are few grounds to "hope for a bottoming of credit quality in Japan's corporate and banking sectors in the next two years," although there are some more promising signs that structural adjustments now taking place in parts of the corporate sector "are expected to broaden and gather pace," said S&P's managing director for the Asia Pacific region Michael Petit, as cited in the release. "Further delays in either structural reform or economic recovery will increase the possibility of another sovereign downgrade," S&P said. While Japan's economy is continuing to contract, many analysts now expect Prime Minister Junichiro Koizumi will face considerable difficulties in effecting tough structural reforms that would force banks to write off bad loans and allowing bankrupt companies to fail. "I am not real sanguine about Japan's prospects in the short or intermediate term," said Robert McGuckin, the Conference Board's director of economic research in New York. "They have an enormous amount of restructuring to do... they are trying to overhaul at the micro level, but they are being overwhelmed by the macroeconomic situation and the need to restructure debt," McGuckin added. S&P's "report speaks for itself. More downgrades are imminent," said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y. "As a minimum, another downgrade of sovereign credit ratings would marginally raise the yield" on Japanese Government Bonds, Weinberg added. Thursday midday in New York, the benchmark 10-year JGB's yield - which moves inversely to its price - was at 1.48%. That's near its highest level since it was at 1.50% in April 2001, reflecting growing concerns about potential downgrades. Jack Malvey, chief global fixed income strategist with Lehman Brothers in Jersey City, N.J. said he expects "a minor directional tilt to higher yields," of JGBs during the first quarter, on the expectation of sovereign downgrades by both Moody's Investor's Service and S&P during 2002. "Scarier, though," than the prospects the sovereign's rating may be cut is S&P's "implicit warning that banks credit ratings could be downgraded too," because potentially credit lines to banks could get cut, preventing those banks from settling their payment obligations and causing a wider financial crisis, said Weinberg. The banking sector, "is weaker than ever before, and some form of government intervention, especially for larger banks appears to be inevitable," S&P added. That statement echoes the existing view of global bond strategists, who have been warning increasingly since late last year that they expect the Japanese government to issue more JGBs in order to bail out creditors of tottering banks. Japan's banks are burdened with around Y150 trillion of bad and non-performing loans, Japan's Financial Services Agency estimated last year. In acknowledging the ever-closer correlation between Japan's sovereign's prospects and those of the banking sector, S&P is echoing remarks that a senior Moody's Investors Service made last week. "We have been saying for some time that there are embedded losses in the banking system amounting to between 10% and 15% of gross domestic product that will eventually migrate to the government's balance sheet," Vincent Truglia, co-head of Moody's Investors Service sovereign risk unit in New York said on Thursday. Jan. 24. After Moody's downgraded Japanese sovereign debt in December, "there is quite a reasonable probability that the rating will go on review once again," Truglia then added. Moodys's remarks "do not bode well for JGBs," said Karim Basta, global derivatives strategist with Merrill Lynch in New York. Last month, Moody's downgraded Japan's long-term debt rating one notch to Aa3. The credit ratings agency then cited increasing fiscal strains, economic weakness, ineffective reform initiatives and the absence of quick-fix policy remedies. Late last year, Standard & Poor's and Fitch both cut Japan's rating to double-A, or two notches off the top ratings. -By John Parry; Dow Jones Newswires; john.parry@dowjones.com; 201-938-2096