Moody's Investors Service today lowered the Government of Japan's rating to Aa3 from Aa2, concluding the rating review that began on May 31. The outlook is 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.

Over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies. 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. Prospects for economic growth are weak, making it more difficult for the government to achieve deficit reduction targets and implement its Comprehensive Tax and Social Security Reform plan.

Support for the stable outlook comes from the undiminished home bias of Japanese investors and their preference for government bonds, which allows the government's fiscal deficits to be funded at the lowest nominal rates globally. 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 rating action does not affect the Aaa country and bank deposit ceilings, the outlooks for which remain stable. Those ceilings act as a cap on ratings that can be assigned to the obligations of other entities domiciled in the country. Japan's short-term rating is unaffected and remains unchanged at P-1.