TEXT-S&P: Japan-China islands spat weighs on Japanese Cos.

(The following statement was released by the rating agency)

Oct 03 - As tensions simmer between Japan and China amid a territorial dispute over a group of uninhabited islands, Japanese companies--which have been battling a strong yen and the global economic slowdown--now find themselves facing another problem, Standard & Poor's Ratings Services said in a report published today. Although anti-Japan demonstrations have eased in China, negative sentiment has led to boycotts against Japanese products, forced some Japanese companies to suspend or partially shutter their factories and stores, and caused travelers from both sides to cancel trips.

"We currently believe that Japanese companies are capable of absorbing the negative impact from the islands dispute without significant damage to their creditworthiness," said Standard & Poor's credit analyst Naoko Nemoto. "However, if the political confrontation drags on and further worsens ties between both countries, it may hurt Japan's macro economy and affect the credit quality of rated Japanese companies on a large scale."

In Standard & Poor's view, it will take a long time for the Japanese and Chinese governments to reach a political solution to resolve the bilateral row, which was sparked by their territorial quarrel over a group of small islands known as Senkaku in Japan and Diaoyu in China. Although it is difficult to predict whether the Chinese government would take measures such as restricting exports or imposing economic sanctions against Japan, in our base-case scenario, we assume that the Chinese government will refrain from such drastic actions. Under our scenario, we assume that some Japanese companies would see moderate revenue declines, although not to an extent that would lead to rating actions. At the same time, we expect the Chinese economy to be less affected by the diplomatic row than the Japanese economy. Although Japanese companies have a sizable presence in China and contribute to both exports and investments in the country, exports to Japan make up less than 10% of China's total.

((Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.reuters.com@reuters.net))