INSTANT VIEW - Moody's cuts Japan rating

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011.

TOKYO (Reuters) - Moody's Investors Service on Wednesday cut the rating on Japan's government debt by one notch to Aa3, blaming large budget deficits and the build-up of debt since the 2009 global recession.

The agency had warned in May that it may downgrade Japan's Aa2 rating due to heightened concerns about its faltering growth prospects and a weak policy response to deal with a bulging public debt, now twice its $5 trillion GDP.

"Several factors make it difficult for Japan to slow the growth of debt-to-GDP and thus drive this rating action," Moody's said in a statement, adding that the March 11 earthquake and ensuing nuclear crisis had exacerbated Japan's problems.

COMMENTARY:

DAIJU AOKI, ECONOMIST, UBS SECURITIES, TOKYO

"Moody's had already indicated the possibility of a downgrade, so the impact on the market will be limited. Also the Moody's cut was by only one notch so that also limits the impact as well."

"Japan has an excess of savings so the risk for debt liability is limited. Long-term interest rates are not likely to rise either for the same reason."

RICHARD D. HASTINGS, MACRO AND CONSUMER STRATEGIST, GLOBAL HUNTER SECURITIES, CHARLOTTE, NORTH CAROLINA

"We are truly entering into an actuarial phase of how rating agencies are looking at developed country credit risk. If we look at the direction of population growth among less productive, older population tiers, and then throw in the potential tax burden on younger population percentiles, then we can lock in a sub-optimal growth rate for years to come, and therefore credit quality must be reconsidered.

"This is not going to stop anytime soon, so we should expect a sort of flattening out of some major sovereign debt issuers - Japan, the United States of course - in terms of slightly lower credit ratings. They'll be on the same level, but the level is stepping down systematically.

"Meanwhile, none of this hurts Japan's ability to internally fund its current requirements and at least its citizens expect higher taxes and years of compromises. These are some of the bright spots in the Japan credit story right now."

TAKEHIRO NOGUCHI, SENIOR ECONOMIST, MIZUHO RESEARCH INSTITUTE, TOKYO

"This is as expected. It remained at the double-A level and the outlook so far is stable, so I think there may not be a very big impact."

"The agency may have taken action at this timing, before the (ruling Democratic Party of Japan) leadership election, sending kind of an alarm signal as there aren't many candidates open to a tax increase."

NAOMI FINK, HEAD OF JAPAN STRATEGY, JEFFRIES (JAPAN) LTD, TOKYO

"JGBs have tended not to show any lasting reaction to ratings downgrades in the past - probably because in Japan the problem if anything is one of over-saving, which banks recycle into JGBs, which remain 'risk free assets'. Unless something changes in the view of JGBs as 'risk free' among domestic investors (who account for over 90 percent of the JGB market) it's hard to see a lasting impact.

"This is not to say that the fiscal balance is eternally sustainable - but the reason it is so far in the red is because the private sector does not consume. It invests and hoards instead."

NORIHIRO FUJITO, SENIOR INVESTMENT STRATEGIST, MITSUBISHI UFJ MORGAN STANLEY SECURITIES, TOKYO

"Stock market investors will likely shrug off the impact because Moody's had warned that it may downgrade Japan's sovereign debt ratings due to a weak policy response to the country's mounting public debt, so it's not a complete surprise."

"We have major developments on the political front, and while most people in the market expect (former foreign minister Seiji) Maehara is very likely to win the election, a swift policy response on debt problems is unlikely to come out soon."

ROB HENDERSON, CHIEF ECONOMIST MARKETS, NATIONAL AUSTRALIA BANK, SYDNEY

"It's hardly a surprise given Japan's gross debt is around 229 percent of GDP, which is higher even than Greece. But neither is it likely to have much impact as almost all the debt is held by the Japanese people and they have no other place to go. So while foreign lenders could pull the pin on, say, Greece, Japan is insulated. There's not going to be a run on Japanese government debt.

"Still, you'd have to think that debt of 229 percent of GDP is unsustainable in the long run."

FUMIYUKI TAKAHASHI, MANAGING DIRECTOR, BARCLAYS CAPITAL, TOKYO

"It's been a while since Japan lost its triple A status, so it is unlikely that the country's interest rate will rise sharply. The stock market is unlikely react to this downgrade."

YUUKI SAKURAI, CEO AND PRESIDENT OF FUKOKU CAPITAL MANAGEMENT INC, TOKYO

"I had expected that the rating cut would have taken place after the election for the leadership the (ruling) Democratic Party of Japan. But looking at the candidates, there seems to be nobody among them who would seriously tackle financial reform so that's why Moody's went ahead and cut the rating."

"Moody's probably has the view that Japan's finances will continue worsening."

JOSEPH CAPURSO, STRATEGIST, COMMONWEALTH BANK, SYDNEY

"Moody's rating is now equivalent to what S&P had for Japan's government debt. So it's just a bit of a catch up. The market didn't react too much and I don't expect dollar/yen to rise that much."

(Editing by Joseph Radford)