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Moody’s Investors Service Inc. on Friday dealt a long-expected blow to Japan’s credit rating, lowering it two notches to A2. The world’s second largest economy and largest creditor nation is now in the same league as Cyprus, Greece and Israel.

The nation’s credit rating has now sunk to three notches beneath that of Italy, a fellow Group of Seven nation, and is five notches below the U.S.-based private rating firm’s highest triple-A rating.

“Japan’s general government indebtedness, however measured, will approach levels unprecedented in the postwar era in the developed world,” Moody’s said, pointing out that Japan is “entering uncharted territory.”

Moody’s noted that, historically, the risk of default at the A2 rating is one in 200. This, however, has done little to placate Cabinet officials, who have accused foreign credit-rating firms of making unfair qualitative judgments and paying too little attention to other factors, such as Japan’s high savings rate.

“After all, they’re doing this for business,” Finance Minister Masajuro Shiokawa said after learning of the downgrade. “They’re probably going to be making a bunch of observations, but that won’t make us change our policies.”

The downgrade comes at a time when credit rating agencies are themselves fighting to retain what they say is their most precious asset — their reputations — as both regulators and markets become more reliant on their ratings.

The agencies are under attack from various groups, including the very companies they have downgraded, investors alarmed at the speed with which ratings can sink, and regulators, who are searching for potential conflicts of interest after the failure of U.S. energy giant Enron Corp.

The downgrade caused barely a ripple in bond and share prices, owing to the fact that Moody’s had warned of the possible downgrade 2 1/2 months ago.

Nevertheless, Shiokawa could barley contain his glee.

“The markets aren’t really paying attention to this,” he said. “The yen is up, isn’t it?”

Shiokawa’s remark helped boost the yen against the dollar, which the Finance Ministry had tried to correct in a yen-selling intervention.

Domestic credit rating agencies Japan Rating and Investment Information Inc. and Japan Credit Rating Agency Ltd. are maintaining Japan’s rating at triple A.

“When you’re looking at bonds with extremely high credit ratings, relative strength of the bonds should be more important,” said Yoshio Shima, head of Credit Research at Deutsche Bank Group, agreeing with one of the Finance Ministry’s main arguments. “In addition, the rapidity of these downgrades makes investors wonder how much stock to place on these decisions.”

Moody’s last downgraded Japan’s sovereign rating, to Aa3, in December.

Japan is in a class of its own, according to the Finance Ministry, which has argued that unlike sovereign ratings for foreign-currency debt, the whole rationale for local-currency sovereign ratings is a moot point.

If the point of credit ratings is to gauge the risk of default, and if Japan accumulates debts in its own currency, then the risk is inflation, not default, according to the government and many private-sector economists.

In Japan especially, domestic investors hold almost 95 percent of government bonds. In a pinch, Japan could simply print money, eliminating the risk of default, the Finance Ministry said, adding that it has no intention to do so at the moment.

Market players note that it is unlikely that domestic investors such as banks, which have massive bond holdings, will unload their bonds in response to the downgrade. Foreign banks and investors, however, may become more cautious before buying.

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