Credit Ratings and the Japanese Corporate Bond Market

This paper examines the credit ratings assigned to Japanese non-financial corporations by Japanese and foreign rating agencies. More of the variance in Japanese than foreign agency ratings can be explained using financial ratios and a few dummy variables. Credit ratings are closely related to market-determined credit spreads, effectively supplementing the information content of financial indicators in the pricing of corporate risk in Japan. The market appears to take the ratings of both Japanese and foreign agencies into account when pricing the debt of Japanese corporations, for a combination of both Japanese and foreign ratings predicts spreads more precisely than any single set of ratings.