Moody’s downgrades Japan’s credit rating

TOKYO — Moody’s downgraded Japan’s credit rating, citing the country’s weak growth prospects, massive government debt and constant political uncertainty.

The cut in Japan’s government bond rating Wednesday to Aa3 from Aa2 puts the country three notches below Moody’s top Aaa rating. Moody’s Investors Service said the outlook for the rating is stable.

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.

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

Kan has been criticized 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 percent.

The country’s economic problems are compounded by the natural disaster and the ongoing 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.

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 No. 3 economy slipped back into recession in the first quarter due to tumbling output and exports following the March 11 earthquake and tsunami.

Moody’s has maintained its AAA rating on the United States while Standard & Poor’s earlier this month took the unprecedented step of downgrading the U.S., blaming large deficits and political gridlock.

The decision compounded worries about the fiscal health of the world’s biggest economies and unnerved already volatile financial markets.

Reaction to Japan’s rating cut Wednesday was more muted. Analysts described the move as hardly a surprise, and bond markets remained calm.

Noriatsu Tanji, a fixed income strategist at Barclays Capital in Tokyo, said that unlike the U.S., a rating cut is not new territory for Japan. At one point in 2002, Moody’s had dropped its assessment on Japan to as low as A2 before gradually upgrading it starting 2007.

“The latest downgrade puts Japan’s rating at a level it has already seen before,” he said in a research note.

Japanese government bonds have historically weathered rating cuts without sharp drops. Unlike the U.S., the vast majority of the Japan’s public debt is owned domestically.

Even as it downgraded its view on Japan, Moody’s highlighted the country’s large economy and dependable domestic funding base that enables the government to fund itself “at a lower nominal cost than any other advanced economy.”

“Furthermore, throughout the global financial crisis, in the months after the March earthquake, and in recent days with renewed turmoil in global markets, (Japanese government bonds) continue to demonstrate exceptionally strong safe-haven features,” it said.