March 6 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson moved to cool concern about rising defaults at subprime mortgage companies, saying the woes won't spill over to banks that make less risky loans.

``Credit issues are there, but they are contained,'' Paulson said to reporters in Tokyo during a four-day tour of Asia. The U.S. financial sector is healthy and most institutions won't feel ``a big impact.''

Shares of New Century Financial Corp., the second-biggest U.S. lender of home loans to risky borrowers, had a record drop yesterday after the company disclosed it faces a criminal probe and JPMorgan Chase & Co. said the company may declare bankruptcy. Lehman Brothers Holdings Inc. reduced its investment rating on mortgage companies because a surge in loan defaults may spread beyond the riskiest credits.

``Paulson is trying to reassure the market because that's been a focus and one of the factors driving down the stocks in terms of how it might fray out for the wider economy,'' said Amy Auster, head of international economics at Australia & New Zealand Banking Group Ltd. in Melbourne. ``We think there will be limited impact both on the housing market and the economy.''

A surge in defaults on mortgages to the riskiest borrowers has forced more than 20 lenders to close or seek buyers since the start of 2006. Fed policy makers this year have repeatedly said that mortgage losses were concentrated in subprime loans, which are designed for lower-income borrowers.

Mortgage Lenders Drop

New Century shares tumbled 69 percent yesterday in New York. The recouped some of the losses today, gaining 10 percent. Accredited Home Lenders Holding Co. lost 26 percent and NovaStar Financial Inc. declined 41 percent yesterday Countrywide Financial Corp., the largest U.S. mortgage lender, fell 4.9 percent.

Paulson, the former chief executive of Goldman Sachs Group Inc., played down the recent stock-market slump, saying that global economic fundamentals are ``good'' and that ``markets seldom move forever in a straight line.''

The Dow Jones Industrial Average has declined 4.6 percent from its record high on Feb 20. It climbed 1.3 percent today, the most since July last year.

Paulson said growth in Japan's economy, the world's second largest, is aiding global expansion and that the government needs to pursue economic reform.

``Japan is on a very good trajectory, but it is very important for Japan to continue with its economic reforms,'' he said.

Japan's Abe

On his first trip to Japan as Treasury chief, Paulson met yesterday with Prime Minister Shinzo Abe before joining his Japanese counterpart, Koji Omi, for a private dinner, where he said they discussed the yen and the slide in stock markets.

``Currencies should be determined by the market,'' Paulson told reporters after the dinner.

The yen fell to 116.57 per dollar at 4:30 p.m. in New York, from 115.53 late yesterday. It had gained about 4.3 percent over the previous seven trading days.

Paulson leaves Japan today for South Korea, where tomorrow he will meet government officials in Seoul. Paulson also plans a stop in Beijing tomorrow, before a speech in Shanghai on March 8, which he plans to use to press China to speed its move to unfettered capital markets.

``If China moves ahead there will be less risk in the world economy and benefits for Japan and the whole world,'' he said today.

To contact the reporter on this story: Kevin Carmichael in Tokyo kcarmichael@bloomberg.net

Last Updated: March 6, 2007 16:33 EST