Japan downgraded by Moody's amid rising fears over debt

Moody's has cut Japan's credit rating by one notch over rising doubts about its ability to reduce debt levels.

The decision by the ratings agency sent the yen to a seven-year low against the US dollar.

The downgrade comes less than a two weeks before a snap general election called by prime minister Shinzo Abe.

His economic stimulus policies and a decision to delay a second sales tax rise will be among the key campaign issues.

Tom Byrne, regional credit officer of Moody's, said the downgrade was closely linked to Mr Abe's decision to delay a sales tax rise due to

be implemented in 2015. The move would make it more difficult for Japan to cut its budget deficit by 2020.

Moody's also warned that efforts by the Bank of Japan to achieve its 2% inflation target through aggressive money printing, or quantitative easing, could make it more expensive for the government to borrow.

Japan's rating has been reduced by one notch to A1 from Aa3 after the economy sank into recession during the third quarter.

The A1 rating is one level lower than China and South Korea, and four lower than the US and Germany, which both have the top Aaa rating.

The Moody's downgrade brings the agency's Japan rating into line with that of Fitch and one notch below Standard and Poor's.

Japan's public debt is twice the size of its economy. Some commentators doubt whether Mr Abe's strategy will revive the economy and restore the country's battered public finances.

Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities, said: "This is particularly bad for Abe because the opposition can attack him for this before the election."

The yen briefly hit a seven-year low against the US dollar on Monday. The dollar traded as high as 119.15 yen - its highest since July 2007 - after the rating decision was announced, before giving up some ground to stand at 118.48 yen, down 0.1% on the day.

The euro also rose to 147.70 yen.

BBC Business