Rating agency Standard & Poor's downgraded Japan's long-term sovereign debt one notch from AA to AA minus , citing the country's ballooning deficit, which it said will further reduce Tokyo's already weak fiscal flexibility.
Politicians and credit ratings agencies have been warning for years that Japan needs to lower its public debt pile, by far the worst among rich nations at double the size of its economy, but progress has proved elusive.
"The downgrade reflects our appraisal that Japan's government debt ratios – already among the highest for rated sovereigns – will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s," S&P said in a statement.
"Specifically, we expect general government fiscal deficits to fall only modestly from an estimated 9.1 per cent of GDP in fiscal 2010 (ending March 31, 2011) to eight per cent in fiscal 2013."
The yen fell broadly, with the dollar rising 1 percent on the day against the Japanese currency to a session high of 83.20, and 10-year Japanese government bond futures dipped.
S&P said the outlook on the long-term rating was stable, reflecting its view that Japan's strong external balance sheet and monetary flexibility partially offset the pressures stemming from the fiscal side.
Japan's outstanding long-term government debt is set to reach 869 trillion yen (£6.64 trillion) at the end of March this year, or 181 per cent of gross domestic product (GDP), the Ministry of Finance says.
If short-term debt is added, Japan's liabilities will hit 204 per cent of GDP this calendar year, larger than 137 per cent for Greece and 113 per cent for Ireland, according to the OECD.
City A.M. Reporter