Moody's downgrades Japan on debt worries

Japan needs more women at work
Japan needs more women at work

Moody's has cut Japan's debt rating by one notch, warning that policymakers will struggle to boost growth and get debt levels under control at the same time.

The downgrade takes Japan's rating to A1 from Aa3. Moody's said its outlook was stable, suggesting another downgrade was unlikely any time soon.

Moody's cited rising government borrowing, growing demand for social programs due to a rapidly ageing population, and the slow pace of economic reforms as reasons for the downgrade.

The rating cut comes as Japan faces a full slate of questions about its plan for economic revival -- dubbed "Abenomics."

The idea was that central bank stimulus, combined with government spending and reforms, would boost prices, leading to more robust growth for the world's third largest economy.

Related: Bank of Japan stuns market with even more stimulus

The program has delivered mixed results. Prices are rising after 15 years of deflation, but Japan's economy slipped into recession in the third quarter following the first phase of a sales tax hike.

The surprisingly poor performance led Prime Minister Shinzo Abe to delay a second sales tax increase, and call new elections.

Moody's said the tax hike delay "could have merits," but it warned Japan was still struggling to find a way to stimulate growth with government debt worth 245% of gross domestic product and rising.

Related: Even Abenomics can't ignore Japan debt

Debt levels will only start to decline "under the most favorable combination of economic and fiscal reforms," Moody's said.

To make it happen, the ratings agency said Japan will need to execute tax and social security reforms, end deflation, improve productivity and grow the economy by more than 3.5% annually.

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