JAPANESE banks, still struggling to recover from the burst of the bubble economy, are under new pressure from ongoing deregulation in the financial sector. Several large Japanese banks have had their credit ratings under review and face the possibility of being downgraded. Moody's has decided to review the ratings of Dai-Ichi Kangyo Bank, Daiwa Bank and Sakura Bank while another international credit-rating agency, Standard and Poor's, put the former two on credit watch with negative implications. This adds to an already long list of Japanese banks and trust companies demoted to lower credit ratings, signalling a further deterioration of their financial positions. ''Except Daiwa Bank, which was put under review because of its acquisition of Cosmo Securities, the asset quality of those banks is worse than originally expected, putting their ratings under pressure,'' Moody's assistant vice-president Shinji Okabe said. Japanese banks, which had high exposure to the stock and property markets, have seen drastic increases in non-performing assets since the two hyperactive markets ground to a halt two years ago. ''Another major reason for putting a watch on these Japanese banks' credit ratings is the increasing risk of operating in the de-regulated banking environment,'' said Yoshio Shima, associate director in Standard and Poor's Asia. Banks will be exposed to more fluctuations in interest rate levels and market risks due to the deregulation, he said. ''Next spring, interest rates of liquid deposits - that is ordinary savings - will be liberalised,'' Mr Shima said. ''Facing competition, we expect interest rate to go up after the ceiling is lifted, thus pushing bank costs of funds higher.'' The interest rate on liquid deposits has been held low by government regulation. With lower credit ratings, Mr Shima said, Japanese banks would face a higher cost of funding in overseas markets when issuing debt instruments or certificates of deposit (CD). Not only do they need to pay a higher margin for the CDs they issue, their off-balance-sheet activities, particularly their trading of derivatives, also will be affected. ''Their counter-parties who do not want to trade with lower-rating agencies, will demand a higher price,'' he said. In the past, lower credit ratings have had minimal impact on Japanese banks in their domestic market because local investors know the banks so well that they find no need to check ratings. However, Mr Shima said this was no longer the case. ''The Japanese investors are getting more rating-conscious,'' he said. ''Previously, Japanese banks did not have so many non-performing assets. But now, the deterioration in banks' asset quality has driven local investors to be more sensitive to credit ratings.'' He said some banks recently have had difficulty raising funds in the financial markets because of poor ratings.
