Moody’s Warning to Japanes Banks Sparks Culture Clash : Finance: A possible downgrade of three Japanese banks’ ratings by a U.S. investors’ service points up differences in business practices.

A warning by Moody’s Investors Service that it might downgrade its ratings of three troubled banks has triggered a cultural collision between aggressive American business practices and the cozy defensiveness of Japanese high finance.

Criticism of Moody’s by anonymous Finance Ministry officials, reported by Japan’s leading financial newspaper, the Nikkei Shimbun, touched off charges that the ministry is improperly pressuring the American rating agency in a bid to downplay the severity of Japan’s banking crisis.

But others involved in the fray charge that Moody’s unsolicited rating of the three banks is part of a heavy-handed strategy to pressure Japanese firms into signing up as clients. Moody’s, which would not comment on its discussion with the Finance Ministry, denies the charge.

Depending on who is talking, Moody’s is either shining a light into dark corners of Japan’s tightly interwoven, deeply troubled financial sector--or playing the role of exploitative outsider.

The brouhaha was touched off last month when Moody’s announced it would review for possible downgrading its ratings on three of Japan’s relatively small and financially weaker banks: Nippon Credit Bank, Chuo Trust & Banking and Hokkaido Takushoku Bank.

Currently, Moody’s gives the banks its lowest or second-lowest “investment grade” rankings. A reduction in ranking would place the banks into the high-risk “speculative” category.

Moody’s said its review was prompted by “growing uncertainty regarding the Japanese authorities’ ability to provide safeguards for overall stability in the banking system.”

Evaluations of the safety of deposits in Japan’s weaker banks depends heavily on judgments about the overall stability of Japan’s interlocking banking system, in which the Finance Ministry requires that the strong help protect the weak. No bank has gone bankrupt for 50 years.

If the current Moody’s review downgrades the three banks’ ratings, its report would probably shed new light on problems in Japan’s banking industry, said Yoshio Shima, credit researcher at Morgan Stanley Japan Ltd.

“If some of them are rated speculative, that might cause problems,” Shima said. “In the worst case, there might be a bank run. . . . There might be a bankruptcy.”

Earlier this month, financial authorities admitted that Japanese banks’ problem loans total at least $472 billion, but many private analysts say the situation is much worse. Some estimates place the total value of bad loans as high as $1 trillion.

“The government is still trying to hide the problem,” Shima said. Now, with Moody’s pending action, “the reality is going to be revealed by an American rating company.”

After Moody’s announcement, the Nikkei Shimbun, Japan’s equivalent of the Wall Street Journal, reported that Finance Ministry officials had complained to Moody’s and protested that there was “a problem with the agency’s posture on ratings.” The article--viewed by many as a story planted by the government--said some bureaucrats believed Moody’s should be removed from the government’s list of approved rating agencies.

“It was an intentional leak in order to hurt or threaten the rating agency,” Shima said. “That kind of threat was improper.”

A Nikkei Shimbun commentary criticized the Finance Ministry’s stance toward Moody’s, declaring that “foreign bankers are fed up because they think this kind of pressure on a ratings agency is outdated.”

Major Japanese rating agencies in Tokyo have generally been less critical than Moody’s of the three banks and of the overall stability of Japan’s financial system.

Among the Japanese rating agencies, Moody’s is considered off-base in its assessment of the banks and in its understanding of the government’s control in protecting the banking system.

“Moody’s says the Japanese government is losing control, but we think the financial order is still being maintained,” said Junji Hamaoka, a manager at Japan Credit Rating Agency, which does not rate any of the three banks. “Although Moody’s has a reputation as an international agency, it has an American way of looking at things.”

Akira Yamagishi, an official in the Finance Ministry’s bank division, said reports of the Ministry’s run-in with Moody’s were exaggerated.

“We didn’t argue with Moody’s,” Yamagishi said. “We just told them, ‘You may not have studied our policies well enough.’ ”

Meanwhile, the Yomiuri Shimbun, another leading Japanese newspaper, reported Friday that officials at Nippon Credit Bank and Chuo Trust & Banking were questioning whether Moody’s pattern of conducting unsolicited ratings is “maybe an attempt to drum up business.”

Ratings in both Japan and the United States are usually done at the request of the firm being rated, for purposes such as qualifying to issue bonds. Firms must pay for these ratings. Unsolicited ratings, on the other hand, are free but not always welcome. That is because they are done for the benefit of other clients of the rating agency, primarily investors with an interest in knowing the credit-worthiness of a firm.

Although the question of who is paying is not supposed to make any difference in how firms are rated, some Japanese companies fear that unsolicited ratings could be made with less knowledge and less sympathy, and thus be lower than the rating they would receive had they paid to be rated.

Even the Japanese word used to translate unsolicited--katte --has vague negative overtones. The word means that one is doing something without permission and perhaps in a selfish way.

An official at a Japanese competitor of Moody’s said the U.S. firm does unsolicited ratings and rates firms more toughly than usual, “and by doing so they get customers. Moody’s tactic is almost coercing potential customers to become customers.”

Yamagishi, the Finance Ministry official, said that although he could not speak for the ministry on this point, in his personal opinion, the controversy may involve an issue of “business style.”

“For example,” he said, “it is possible to say, ‘If you don’t want us to write bad things about you, then you should do business with us.’ Moody’s denies doing that, so I suppose they’re not.”

Velvet Yoshinami, spokeswoman for Moody’s in Tokyo, described the accusation in the Yomiuri article as unfair. Moody’s makes no distinction, she said, in how it handles ratings for firms that request ratings and those that are unsolicited. Yoshinami said she could not comment specifically on Moody’s dealings with the Finance Ministry concerning the review of the three banks.

Chiaki Kitada of The Times’ Tokyo bureau contributed to this report.