Japan's local currency debt rating was raised one level to A1 from A2 by Moody's Investors Service, Moody's said Thursday, citing confidence that the government will pursue debt-cutting measures.

The increase in the long-term rating to the fifth-highest investment grade was the first by Moody's since it assigned Japan the top Aaa grade in 1993. Japan has ¥834.4 trillion in public debt, the equivalent of the economic output of Asia-Pacific's next 16 largest economies combined.

Prime Minister Yasuo Fukuda is committed to curbing the country's debt, the world's largest, through spending cuts, Moody's Senior Vice President Thomas Byrne said in a statement. Fukuda last month replaced Shinzo Abe, who resigned after the Liberal Democratic Party-New Komeito ruling bloc lost control of the Upper House, prompting speculation the coalition would spend to win votes.

"Japan's fiscal situation is getting much better with an effort to balance the budget," said Masaru Hamasaki, a senior strategist at Toyota Asset Management Co.

The one-notch upgrade to A1 puts Japan's rating on a par with Greece, Chile and the Czech Republic.

Standard & Poor's raised Japan's debt rating to AA, its third-highest, on April 23, citing the government's progress in cutting the debt. Moody's rating is now two levels behind S&P's. Fitch Ratings has kept Japan at AA-, its fourth-highest rating, since 2002.

In the past 10 days, Finance Minister Fukushiro Nukaga, economic and fiscal policy minister Hiroko Ota and Fukuda himself pledged not to sway from the goal of balancing the budget.

Byrne said continued debt reduction will require stronger economic growth, "which suggests that monetary policy will need to continue to remain accommodative."

Abe's administration cut new bond sales by a record and trimmed public works spending in his budget for the year ending next March. The Finance Ministry estimates the primary deficit, which excludes bond sales and interest payments, will drop to ¥4.4 trillion this fiscal year from ¥11.2 trillion last year.

Moody's put Japan's rating on review for a possible upgrade July 4, after changing its long-term credit outlook to positive in June 2006.

It reduced the rating from its highest Aaa rank in November 1998, the year Japan was struck by a bout of deflation, and followed with three further reductions, most recently a two-notch cut to A2 in May 2002.

"My view is that the downgrade many years ago was inappropriate because even though Japan's debt is huge, it's held by the Japanese and they are not about to dump those bonds," said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. "So the upgrade is a natural response."