In the latest sign of sagging confidence in Japan's financial system, Moody's Investors Service said Wednesday that it has downgraded credit and financial-strength ratings for five major Japanese banks and put another four on review for possible downgradings.
The news, coming days after Japanese banks announced huge bad-debt writeoffs for the fiscal year ended March 31, underscored the industry's vulnerability to further declines in domestic asset prices and to losses on loans extended to companies in Southeast Asia.
The action was a vote of no confidence in Japanese financiers' efforts to restructure in the face of growing competition resulting from deregulation.
"Officials have made statements recently concerning new measures to resolve the bad-loan problem and to restructure and consolidate the industry," said Moody's.
"However, the rating agency does not expect that the authorities will be able to make material progress in this regard over the medium term because of powerful inertial forces that have so far successfully prevented major action to resolve insolvent banks decisively and to reduce the industry's capacity."
Moody's downgraded Bank of Tokyo-Mitsubishi Ltd., Industrial Bank of Japan Ltd., Dai-Ichi Kangyo Bank Ltd., Sakura Bank Ltd., and Sumitomo Bank Ltd.
At the same time, it put under review for possible downgrading Asahi Bank Ltd., Long-Term Credit Bank of Japan Ltd., Fuji Bank Ltd., and Tokai Bank Ltd.
Nippon Trust and Bank Ltd., a Tokyo-Mitsubishi subsidiary, also saw its long-term rating downgraded, Moody's said.
Tokyo financial markets swooned at the news; the yen and Japanese stocks and bonds all weakened.
"The downgrades added another factor for selling yen for the dollar in the mid- to long-term," said Takayuki Togawa, manager of foreign exchange at Tokai Bank.
The dollar edged up to an intraday high of 137.98 yen - just shy of its 81-month high of 138.07 set in the previous session-before settling to 137.90 yen late in Tokyo, up from 137.85 in New York late Tuesday.
The Nikkei stock index ended the session 220.53 points lower, at 15,664.29. The Nikkei index of banking sector shares fell 1.5% amid rekindled credit worries for Japanese banks.
In the debt market, the yield on the benchmark 10-year government bond hit a record low of 1.20% midway through the session before the Moody's news triggered profit-taking that undermined prices and buoyed the yield back to 1.24%.
Moody's said it made the move due to concern that Japanese banks may have difficulty cleaning up their balance sheets as a result of the tough operating environment.
"Japanese banks face these asset-quality challenges with weak underlying profitability and very low capital and reserve levels," Moody's said.
"In the absence of major structural reform and reduction in the industry's capacity, it will be difficult for Japanese banks to achieve sufficient levels of profitability to rebuild balance sheets and restore creditworthiness," Moody's added.
In the last week, Japan's nine money-center banks all announced pretax losses for the fiscal year ended March 31, as they used up a substantial portion of their reserves to write off bad debt.
Bank of Tokyo-Mitsubishi, considered the healthiest of Japan's so-called city banks, suffered $6.65 billion of pretax losses last fiscal year after writing off more than $10.1 billion of bad loans-or more than half the $16.3 billion of bad debts it has disclosed.
But analysts have pointed to the banks' exposure in Indonesia as a major dark cloud hanging over the industry. At March 31, for example, Bank of Tokyo-Mitsubishi had about $3.3 billion of loans outstanding to companies in Indonesia.