On Aug 24, Moody's, one of the three credit ratings giants, cut Japan's credit rating by one notch to Aa3, and said the outlook remains "stable." The main reasons for the move were Japan's huge fiscal deficit, increased national debt and the lack of consistency in its policies due to its frequent change of prime ministers.

This is not at all surprising. The Japanese economy suffered a downturn of more than a decade after the burst of the Japanese asset price bubble. Since 1992, Japan has sought to stimulate its economy through large government expenditure, which has led to a huge fiscal deficit. To achieve fiscal balance, the government had to issue long-term national debt, which resulted in a swelling sovereign debt. Now Japan has become a debt-ridden country.

In the past 20 years, the proportion of the Japanese government's debts to GDP has climbed from 50 percent before the bursting of the economic bubble to the present 200 percent. Data released by Japan's Ministry of Finance on Aug 10 showed that the total national debt hit a historic record of 943.81 trillion yen (about $12 trillion). Given its population of 127.92 million people, Japan's per capita debt is 7.38 million yen, which tops developed countries.

The IMF estimates that if local government debts are added, Japan's total national debt will reach 997 trillion yen in the 2011 fiscal year, probably 227.5 percent of GDP.

The Organization for Economic Co-operation and Development, an international organization that seeks to stimulate economic progress and world trade, said the proportion of Japan's fiscal deficit to GDP last year was about 8.14 percent. In addition, the March 11 earthquake devastated the country's economy, meaning its prospects are bleak.

However, the downgrading will not severely impact Japan or the world.

International financial markets responded immediately to the downgrading. The downgrading was linked to the US', but compared to the US, the fall of Japan's credit rating had a more limited influence on markets around the world.

There are several reasons for this. First, the coverage of the Japanese economy is relatively limited, and the internationalization of the yen is still low.

Second, the international market is already quite familiar with Japan's fiscal situation, so the lowering of its credit rating will not have an immediate impact on financial markets.

Third, since S&P and Fitch had already lowered their rating for Japan's debt, Moody's action just echoes those two institutions. Therefore, any response from the exchange market or Japanese debt market to the Moody's rating will be temporary.

Meanwhile, Japanese national debt is relatively safe, meaning a debt crisis is unlikely.

Recently, due to the exposed debt problems of the US and European countries, the sovereign credit ratings of the US and Greece have been lowered. While the instability of its exterior economy increases, Japan's national debt will continue to act as a safe investment for those seeking risk aversion. It is, in fact, a relatively safer bond to hold compared to those of the US and Europe.

There are three reasons for this.

First, in recent years, 95 per cent of the rise in Japan's national debt was bought by Japanese citizens, which differs greatly from the situation in Europe. Most of the debt of European countries like Greece was bought by foreign investors, who face a greater risk as the international financial crisis has not yet wound up. To some extent, Japan will not suffer from the same debt crisis Europe did.

Second, the return on Japanese debt bonds is relatively high. Bank of America Merrill Lynch data show that in April the average rate of return on long-term Japanese bonds reached 2.2 percent, while the average rate of return for the whole bond market was only 1 percent.

Third, Japan distinguishes itself from other developed countries in its high individual deposit rate, and therefore the government does not have much concern when issuing national debt bonds.

The author is the director of the Department for World Economy and Development Studies at the China Institute of International Studies.