Japan sees credit rating downgraded

Moody's Investors Service downgraded Japan's credit rating, citing the country's weak growth prospects, massive government debt and constant political turmoil.

Moody's cut Japan's government bond rating to Aa3 from Aa2. The new rating is three notches below Moody's top Aaa rating. It said the outlook for the rating is stable in a statement released early in the Asian financial day today.

The downgrade puts Moody's Japan rating in line with other major agencies. Both Standard & Poor's and Fitch rate Japan AA-, three notches below their top AAA ratings.

In May, Moody's warned it could downgrade Japan after the world's third largest economy slipped back into recession in the first quarter due to tumbling output and exports following the March 11 earthquake and tsunami.

Frequent administration changes have prevented Japan's government from adopting effective long-term economic and fiscal policies, Moody's said.

The rating cut comes ahead of another leadership shuffle in Japan.

With his popularity sinking, prime minister Naoto Kan and his Cabinet are preparing to resign next week. That would set the stage for a leadership election within the ruling party and a new prime minister - Japan's sixth in four years.

Mr Kan has been criticised for lacking leadership after the March 11 earthquake and tsunami and subsequent nuclear crisis, and survivors of the disasters complain of slow relief and recovery efforts. Polls show his approval rating is below 20%.

The country's economic problems were compounded by the natural disaster and the subsequent nuclear crisis. Japan's ballooning debt is now twice the size of the country's gross domestic product.

"These developments further hamper the economy's ability to achieve a growth rate strong enough to steadily reduce the budget deficit," Moody's said.

Moody's has maintained its AAA rating on the United States. Standard & Poor's earlier this month took the unprecedented step of downgrading the US, citing its large deficits and political gridlock.

PA