In the wake of Tuesday’s sovereign downgrade, Fitch Ratings has placed the ratings of major Japanese banks on rating watch negative, for a possible downgrade.
The rating agency said Wednesday that the move reflects the government’s reduced flexibility to provide financial assistance to banks if the needed it. “The government’s financial soundness underpinning its ability to extend support has continued to weaken due to growing fiscal pressure from rising social security costs in particular,” it says.
However, Fitch adds that it believes the Japanese government’s propensity to support major banks, when necessary, remains intact, given their systemic importance in both domestic and overseas markets.
The ratings for major insurance companies were not impacted, as they aren’t linked to an expectation of government support. Fitch did revise its outlook on Nippon Life Insurance Co’s ratings to stable from positive, and affirmed its ratings for Daido Life Insurance Co. and Mitsui Sumitomo Insurance Co. Ltd., saying, “each of these Japanese insurers’ ratings are underpinned by their strong franchise, prudent capital and liquidity and, therefore, would not be impacted by the sovereign rating downgrade.”
In the case of Nippon Life, Fitch says the change in outlook reflects the remote prospect of an upgrade given its current rating is now at the same level as the sovereign, and the fact that Fitch does not rate the insurers more than a notch above the sovereign rating due to their concentrated business portfolio in Japan.
Additionally, Fitch says that it does not expect the sovereign downgrade to have any significant impact on Japan’s capital market or economy. “Japanese government bond yield has thus far remained low despite deteriorating sovereign creditworthiness. This is mainly supported by ongoing strong demand from domestic investors. Fitch therefore does not expect a significant decline in JGB prices due to the sovereign downgrade and, consequently, substantial impairment to the insurers’ capital adequacy position,” it says.