Moody's Investors Service has lowered the Japanese government'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," the agency said.
"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," Moody's said.
Japanese Prime Minister Naoto Kan announced on Tuesday he will step down shortly and expects to see his successor in office by next week.
Moody's also said the March 11 earthquake and tsunami, and the subsequent disaster at the Fukushima nuclear power plant have "delayed recovery from the 2009 global recession and aggravated deflationary conditions," making economic growth prospects "weak."
