Japan's economy, the world's third largest, has slid back into recession after the devastation caused by the earthquake and tsunami in March 2011.

The country's economic problems were compounded by the natural disaster and the subsequent nuclear crisis.

It's Gross domestic product shrank 0.9% in the first three months of the year.

For the past two decades (1990s), the country has been in state of economic stagnation. But the country has an excess of savings, so the risk for debt liability is limited.

The outlook for the rating have been kept stable by Moody's.

In May, Moody's had already indicated that it could downgrade Japan, so the impact on the market will be limited.

"These developments further hamper the economy's ability to achieve a growth rate strong enough to steadily reduce the budget deficit," Moody's said.

Moody's also said that Japan needs to achieve 3% nominal GDP growth to get deficit under control and the current yen level is stressful but not dread for the Japanese economy.

Japan's plan to double sales tax rate to 10% by mid decade is also not enough to fix debt problem. However, they did say that they do not expect to further change sovereign rating for 12-18 months.

The recent downgrade may hamper Japanese Yen on temporary basis.

Though the country's credit rating has been downgraded by Moody's but Japan's Finance Minister is still confident about the country's growth due to strong sales of Japanese government bonds.

"I will not comment on the actions of a private rating agency. The smooth sales of Japanese government bonds at recent auctions show that confidence remains unshaken," Finance Minister Yoshihiko Noda told reporters, according to Dow Jones Newswires.

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