| [ Japanese ]
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| It is regrettable that your letter of June 24 etc. have not removed our doubts about your sovereign ratings and methodologies. |
| First, you have continued to fail in giving objective grounds for the different ratings among various countries. If you assert that your ratings reflect default risk, you should explain in specific terms, for example, what kind of a contingency scenario you assume for each country and in what time span. Your letters and published documents describe the policy direction of each country, but they fail to explain how the latter leads to the differences in each country’s ratings. |
| Second, you assert that in rating sovereign debt you take into account not only fiscal indicators, but also economic fundamentals. However, your letter and published documents simply refer to such ratios as government debt to GDP in determining a specific rating. Fiscal indicators should not be the only explanatory variables for sovereign ratings. We would ask you to clearly explain why fiscal indicators almost always dominate economic fundamentals in sovereign ratings. |
| Incidentally, you assert that Japan’s general government indebtedness will be entering “uncharted territory.” Clearly, you underestimate the advantage of the huge domestic savings, and ignore the fact that the U.S. had public debts equivalent to more than 120% of GDP shortly after the end of World War II, and that the comparable figures for the U.K. were close to 200% in the early 1950s. You have also failed to explain in what way your rating is consistent with the low real interest rates in Japan which reflect the market’s confidence in the government’s solvency. Market participants and economists also criticize the fact that your analysis does not fully reflect macro-economic balances. |
| Third, we are concerned about your ratings because we believe that ratings are important in the market and that a lack of an objective, quantitative explanation could mislead the market. Although the market did disregard the downgrading your company made in May, it may be influenced in the future. Should any government or corporation suffer unwarranted damages, it possesses the right to claim compensation. |
| Fourth, we would like you to elaborate on your methodology determining the different ratings of each country, citing concrete cases and explaining how you took into consideration economic fundamentals other than fiscal indicators. You have admitted that your rating judgement with regard to U.K.’s sovereign debt in the 1970s was wrong, but surely you are obliged to explain the apparent inconsistency of Japan’s rating with so many other countries including U.S. in the mid-80s. |
| Finally, I would like to add a few points. |
| First of all, you maintain that Japan’s strong external position is reflected in the rating for foreign currency obligations. If this is the case, the foreign currency rating must be AAA. |
| You also claim that due to the small number of samples, it is difficult to explain the factors relating to sovereign ratings in a statistically meaningful way. This claim considerably undermines the credibility of sovereign ratings. If this is the case, ratings of industrialized countries would be meaningless since none of them has ever defaulted, and such ratings would only give the market unnecessary confusion. You should clearly state it to the market and the general public. |
| I believe it is useful to continue our discussions. In this context, it is essential to evaluate more explicitly each factor relating to the differences in the rating levels of each country. |