With domestic investors holding more than 90 percent of Japanese government bonds, the downgrade "probably won't prompt them to move money out of Japanese bonds into foreign assets because the problem of sovereign debt is worsening worldwide," said Naomi Hasegawa, a senior debt strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan's largest lender by assets.

'Regrettable' Decision

Economy and Fiscal Policy Minister Kaoru Yosano called the downgrade "regrettable." He said Prime Minister Naoto Kan's "commitment to fiscal reform hasn't been fully understood" and the government needs to step up its efforts to increase revenue and pare debt.

"I've just heard about it," Kan told reporters in Tokyo more than an hour after the news was released. "I'm not familiar with the matter, so please ask me later."

Chief Cabinet Secretary Yukio Edano said minutes later that he couldn't confirm when Kan, who spent most of the day in parliament, first heard the news.

Kan, whose approval rating has halved since he took office last year, appointed Yosano this month to help draft a fiscal policy plan and called for a national debate on raising the 5 percent sales tax. The premier's ability to push through legislation has been weakened by opposition control of the upper house of parliament.

The Democratic Party of Japan-led government "lacks a coherent strategy" to tackle the nation's debt, S&P said. In addition, government debt ratios are likely to rise "further than we envisaged before the global economic recession hit the country," the company said.

China Versus Japan

By putting Japan alongside China, the downgrade highlights the rise of the neighbor that has led the global recovery. S&P has upgraded China five times in the past decade, most recently in December when it cited the nation's world-record foreign- exchange reserves, now $2.85 trillion.

The International Monetary Fund estimated that China's ratio of debt to GDP would be 20 percent in 2010, a prediction that excluded local-government liabilities. In comparison, it estimates Japan's burden exceeds 200 percent.