(Bloomberg News)  Japan's credit rating was cut for the first time in nine years by Standard & Poor's as persistent deflation and political gridlock undermine efforts to reduce a 943 trillion yen ($11 trillion) debt burden.

The world's most indebted nation is now ranked at AA-, the fourth-highest level, putting the country on a par with China, which likely passed Japan last year to become the second-largest economy. The government lacks a "coherent strategy" to address the nation's debt, the rating company said in a statement. The outlook for the rating is stable, S&P said.

The yen and bond futures fell on concern the downgrade will push up the cost of borrowing for Japan, where public debt is about twice the size of gross domestic product. Vice Finance Minister Fumihiko Igarashi this week said the government must fix its finances to avoid a debt crisis that could trigger a "global depression."

"I hope this serves as a warning for the government, they have absolutely no sense of crisis," said Azusa Kato, an economist at BNP Paribas in Tokyo. "Once bond yields spike and the fire is lit, the amount needed to finance Japan's borrowing needs is going to jump and it's going to be too late."

Credit-Default Swaps

The yen weakened and stocks swung between gains and losses after the announcement. The currency fell against all of its main counterparts and was trading at 82.89 per dollar as of 8:49 a.m. in New York. The Stoxx Europe 600 Index added 0.2 percent, while the MSCI Asia Pacific Index slipped 0.1 percent, erasing a 0.6 percent advance. Ten-year Japanese bond futures for March delivery declined to 139.56 at the Singapore Exchange.

The cost of protection against a default by the Japanese government rose. Credit-default swaps jumped 4 basis points to 84 basis points, according to Deutsche Bank AG, set for the biggest daily increase since Nov. 30, prices from data provider CMA show.

Thirteen Japanese companies included in the benchmark Topix stock index are more highly rated than AA- by S&P, including Toyota Motor Co. Shiori Hashimoto, a spokeswoman for Toyota City, Japan-based Toyota, declined to comment.

It is possible for companies to have higher ratings than the local or foreign currency ratings of their home country, S&P said in a May 2009 report. The best candidates have a robust export base, little reliance on the public sector and sell products with "relatively inelastic" demand. The S&P report said businesses with sales mainly in local currency, subject to regulation and heavily dependent on imports probably won't pass stress tests without "heavy overcollateralization or reserves."

Downgrades In Europe

Japan joins developed economies including Portugal and Spain in being downgraded as emerging nations bounce back more strongly from the global recession. The previous change to Japan's rating by S&P was an upgrade in 2007, before the financial crisis. The nation lost its AAA rating, the highest grade, in 2001 after holding it since 1975.

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