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.