Tokyo, Mar 9: Failures of Japanese financial institutions and Asia's economic turmoil have drawn attention to credit rating agencies, but their assessments should not be seen as absolute, an official at a leading Japanese credit ratings group says.Formerly low-profile rating agencies have become more visible through mass media since the financial failures, but investors may have gotten wrong ideas about the role of the agencies, Mariko Kodama, manager of the credit rating department at Mikuni and Co Ltd, said in an interview.
Kodama said Japanese financial markets and the public may have perceived the rating agencies as the ones that led to the "unthinkable" collapse of Yamaichi Securities Co Ltd and other failures.
"The process of assessing a credit rating is actually complex, involving more than just the final grade," Kodama said.Investors are able to measure the risk offered by a company or a country through credit ratings, but ratings should not be a tool to make a final business judgement, Kodamasaid."Credit ratings should be only one source of reference in setting up portfolios. Investors should not think of ratings as absolute," Kodama said.Japanese investors traditionally ignored credit risks when investing because they believed Japan would not allow major companies to fail, Kodama said.
"For a long time, (Japanese investors) did not have to consider credit risks, especially those of Japanese banks or listed companies, because investors believed those firms would not go bankrupt," Kodama said.
In the past, companies assumed in times of trouble they would receive financial support from their banks, and the banks in turn assumed the government would help them.
But as investors started to realise that times had changed, they began to rely more heavily on credit ratings to judge the level of risk involved.
Kodama said the widening of the spread between the yields of a five-year debenture issued by the Industrial Bank of Japan and a five-year Japanese government bond, which began early in 1997,could be the first sign of investors starting to think they had to look out for themselves.
Overseas investors were the key subscribers to Mikuni's credit rating information in the 1980s, but in the 1990s many Japanese investors started to realise the importance of credit risks in their investment strategies.
The Mikuni credit rating service started in 1983. Up to the present the company has assigned about 1,600 ratings, the most among Japanese rating agencies.
Kodama said in order to maintain credibility with investors and avoid misunderstanding, a credit rating should be based strictly on information available to the public.
"It is indispensable that a rating be based on public information or clearly say where the information was obtained. Investors and a credit rating agency should be on the same page," Kodama said.
"If they are not, it could lead to misunderstanding and cause confusion," Kodama said.
Kodama said if an agency assessed a rating using exclusive information without disclosing thesource, investors might have to accept the rating at face value.
