Japan's debt rating was downgraded to Aa3 from Aa2 by Moody's. The cut came over concerns about the level of the Asian giant's budget deficit and borrowing.
However, the rating agency said Japan's outlook was stable. Although Japan is the world's third largest economy, it has the highest public debt level among developed nations.
Japan is in a recession and registered negative growth rates for three straight quarters. Japan's economy contracted at a yearly rate of 1.3 percent during the second quarter of 2011.
The country is still recovering from being hit by a massive earthquake almost six months ago.
On the same day of Moody's downgrade, Tokyo announced the release of $100 billion foreign exchange reserves to the Japan Bank for International Cooperation to help exporters and increase imports, Japanese Finance Minister Yoshihiko Noda said.
Japan holds $1.07 trillion in foreign exchange reserves, which is the second largest in the world next to China.
The release aims to battle the strong yen, which has been rising to post-World War II highs since the March 11 earthquake. The strong currency is undermining Japan's recovery.
Thomas Byrne, vice president of Moody's, agreed that the yen's continued appreciation is bad for the Japanese economy and could even worsen Tokyo's fiscal problems.
Moody's also cut the ratings of Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group by one step following the rating agency's downgrade of Japan's credit rating.
Moody's said that one factor behind its doubt over the ability of the Japanese economy to recover is the country's power problem caused by the Fukushima Daiichi nuclear disaster, which led to the reduction of the country's nuclear power output and an order for residents to reduce use of electricity.
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