Moody's on Wednesday downgraded the sovereign rating of world's third largest economy, Japan, citing concerns about spiralling government debt.
Global rating agency Moody's has cut down Japan's rating to 'AA2' from 'AA3', indicating slightly higher credit risks than before. However, the outlook is maintained as stable.
"The rating downgrade is prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession.
"Several factors make it difficult for Japan to slow the growth of debt-to-GDP and thus drive this rating action," Moody's Investors Service said in a statement.
Japan's rating cut comes less than three weeks after the US, the world's largest economy, was stripped of its 'AAA' rating by another rating agency S&P. The devastating earthquake and tsunami in March has also impacted the Japanese economy.
"The March 11 earthquake and tsunami, and the subsequent disaster at the Fukushima Daiichi Nuclear Power Station, have delayed recovery from the 2009 global recession and aggravated deflationary conditions," Moody's noted.
Regarding the stable outlook, the rating agency said the move comes from the undiminished home bias of Japanese investors and their preference for government bonds. This allows the government's fiscal deficits to be funded at the lowest nominal rates globally, it added.
"We believe that this funding cost advantage will be sustained by considerable institutional and structural strengths, which will prevail even with large budget deficits in 2011 and 2012," the statement said.
Japanese economy has slipped into recession and contracted by 1.3 per cent in the June quarter. Generally, recession refers to economic contraction for two straight quarters.