JAPAN'S problem-ridden banking sector is affecting the region's debt market, lifting Japanese banks' funding costs and forcing arrangers to focus on high-quality credits, according to Asian debt markets newsletter basis point. The newsletter quoted Japanese banks blaming the issue of bank financial strength ratings by Moody's Investors Service in August. The rating agency weighed up 50 Japanese banks on the basis of their stand-alone strength and found many wanting, issuing 10 with E ratings. Banks rated E have very weak intrinsic financial strength, requiring periodic outside support or suggesting an eventual need for outside assistance, according to Moody's ratings definitions. Partly because of the financial difficulties of an Osaka credit union and Hyogo Bank, and Daiwa Bank's losses of US$1.1 billion trading US treasuries, Japanese banks were now paying 20 to 25 basis points (0.2 to 0.25 percentage point) more for one, three or six-month funding, the newsletter said. The problem had spread to South Korean banks, it said, citing two factors. First, Korean banks were mainly funded through Japanese banks, and second, credit department decision-makers unfamiliar with the region categorised Korea along with Japan, believing that weakness in one banking system might be reflected in the other. 'While the increased short-term funding problem is obviously affecting the Japanese and Korean banks' power to underwrite and arrange term deals, it is also affecting sell-down,' the newsletter said. It said Japanese regional banks were paying even more than top Japanese banks for short-term funds, and were consequently refusing to consider any deal with a margin of less than 40 basis points. Since Asia was the region where Japanese banks wanted to expand lending and foster relationships, they would have to negotiate harder to earn higher pricing on deals, it said. 'Non-Japanese banks without the [Japanese banks'] funding problem will welcome this breathing space and the prospect of rising yields in Asia,' the newsletter said.