Japan's embattled electronics sector suffered another blow on Thursday as ratings agency Fitch downgraded industry titans Sony (IW 1000/39) and Panasonic (IW 1000/31) to junk status for the first time.
The agency slapped a speculative rating on each firm, pointing to their weak balance sheets and declining position in the global electronics sector as they come up against stiff competition from overseas.
In the wake of huge losses, Panasonic, Sony and rival Sharp (IW 1000/115) have announced massive corporate overhauls that include selling off divisions and tens of thousands of job cuts as their shares plunged.
Japan's electronics sector has suffered from myriad problems including a high yen, slowing demand in key export markets, fierce overseas competition and strategic mistakes that left their finances in ruins.
Panasonic has warned it is on track for a $9.6 billion annual loss, while Sony expects to eke out a small profit, after four years in the red.
Both Firms Given Negative Outlook
On Thursday, Fitch said it cut Panasonic by two notches to BB, while it slashed Sony's rating by three notches to BB-, with both firms given a negative outlook.
The downgrades mean their debt was no longer considered a safe investment.
Panasonic and Sony have suffered downgrades by other global ratings agencies, but Thursday was the first time either saw their credit rating slashed to speculative grade.
Earlier this month Fitch cut Sharp's rating to junk, which followed a similar decision by Standard & Poor's.
Fitch said Thursday its downgrade of Panasonic was due to its "weakened competitiveness in its core businesses, particularly in TVs and panels, as well as weak cash generation from operations."
"It also reflects the agency's view that the company's financial profile is not likely to show a material improvement in the short to medium term," it added in a statement.
Warns over Pace of Recovery
Panasonic's huge restructuring "will help gradually improve operating margins," Fitch said, but warned over the pace of any recovery.
It cast doubt on Sony's prospects, saying a "meaningful recovery will be slow, given the company's loss of technology leadership in key products, high competition, weak economic conditions in developed markets and the strong yen."
The downgrades were released after markets closed with Tokyo's benchmark Nikkei 225 index surging to its highest close in over six months Thursday on the back of a weaker yen.
"The [rating] action might impact the affected companies themselves, but I expect the overall market will not be brought down by that," said Kenji Shiotani, strategist at Daiwa Securities.
Sharp Deal with Hon Hai on Hold
On Thursday, a senior executive at Sharp said a planned deal for Taiwan's Hon Hai Precision to buy about 10% of the Japanese firm was on hold amid Sharp's volatile share swings, as the firms haggle over a new purchase price.
The stock "needs to stabilize" before a deal can be clinched, the executive told reporters in Tokyo on condition of anonymity.
The agreement was announced before Sharp shares plunged earlier this year and trading has been volatile ever since, throwing a wrench into plans for the more than $800 million capital injection by Hon Hai, which makes Apple gadgets in China.
Japan's electronics giants have seen big losses in their television businesses owing to falling prices as they try to compete with lower-cost South Korean and Taiwanese rivals.
The high yen -- which hit record levels around 75 against the dollar last year and remains historically strong -- makes Japanese firms' products less competitive overseas. High labor costs at home have made it tough for the nation's electronics companies to compete globally.
They were also hit badly by a consumer boycott in China over a territorial row with Beijing, and a slump in manufacturing caused by last year's earthquake-tsunami as well as floods in Thailand where a number of factories are based.
Copyright Agence France-Presse, 2012