Moody's Investors Service Inc. on Tuesday lowered its rating on yen-denominated domestic securities issued or guaranteed by the government to Aa3 from Aa2 and maintained a negative outlook on these securities.

But Japan's Aa1 foreign currency ceilings and the government's Aa1 rating for internationally issued bonds, including Euroyen bonds, were unaffected by this action and have maintained their stable outlook, according to the U.S. credit-rating agency.

This is the first downgrade by Moody's since September 2000, making Japan's domestic bond rating the same as Italy's at the lowest level among the Group of Seven major industrialized countries.

The move comes on the heels of similar downgrades in November by the major credit rating agencies Standard & Poor's Corp. and Fitch Ltd.

S&P cut its long-term local and foreign currency sovereign credit ratings on Japan to AA from AA-plus with a negative outlook. Fitch downgraded Japan's long-term local and foreign currency sovereign ratings to AA from AA-plus with a negative outlook.

Moody's said its decision to lower the government's domestic bond rating was prompted by fiscal strains that will likely persist owing to Japan's ongoing economic weakness and apparent lack of effective policy remedies.

"In Moody's opinion, Japan's general government debt and debt-servicing requirements will continue to rise even under optimistic assumptions," it said, noting the current downturn in global economic conditions further complicates the situation.

Moody's also said deflation in Japan is exacerbating overall credit risks throughout the economy as debt rises in real terms.

"Neither current macroeconomic policies nor new reform initiatives offer much tangible hope for an early turnaround in economic performance," it said.

Even if a consensus were reached with regard to the implementation radical measures, such as inflation-targeting, the overall effects on the economy and investor behavior are theoretical and uncertain, it said.

The agency noted, however, that Japan has considerable strengths, including a strong external position and a large pool of domestic savings from which it can finance its fiscal deficit.

"Moreover, the very high popular approval of the (Prime Minister Junichiro) Koizumi administration, if sustained, provides political support for government attempts to address Japan's deeply entrenched problems," it said.