By Leika Kihara and Stanley White
TOKYO (Reuters) - Moody's Investors Service on Monday downgraded Japan's sovereign debt rating by one notch to A1, citing rising uncertainty over the country's ability to hit its debt-reduction goal.
The announcement briefly sent the yen to a seven-year low against the dollar and pushed 10-year Japanese government bond (JGB) futures down by 10 ticks.
The downgrade came less than two weeks before Japanese Prime Minister Shinzo Abe seeks re-election at a snap poll where his stimulus policies and a decision to delay a second sales tax hike will be among the key campaign issues.
The jury is out over whether Abe's strategy will revive the economy and restore the country's tattered finances.
"This is particularly bad for Abe because the opposition can attack him for this before the election," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
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"There are concerns the Bank of Japan's quantitative easing and Japan's high household assets have made the government complacent on fiscal policy."
The U.S. rating agency said the outlook was stable.
Moody's said that while Abe's decision to delay next year's scheduled tax hike could support the economy in the short term, it had made it more challenging for Japan to achieve its target of balancing its budget by 2020.
"Fiscal consolidation will become increasingly difficult to achieve as time passes given rising government spending, particularly for social programs associated with a rapidly ageing population," the rating agency said.
Hours before Moody's announcement, Abe had stressed in a televised public debate that Japan remained committed to fiscal reform, and that the Bank of Japan's ultra-loose policy was not aimed at monetising public debt.
But Moody's warned that the BOJ's efforts to achieve its 2 percent inflation target through aggressive money printing may eventually push up bond yields and raise government borrowing costs.
"Rising interest rates would increase expenditure and offset gains from revenue buoyancy," it said, adding that there was increasing uncertainty about how quickly Abe can deliver his "third arrow" policies to boost Japan's long-term growth.
Japan's A1 rating is one notch lower than China, and four lower than the United States and Germany, which have retained their top Aaa ratings.
Japan's public debt, at twice the size of its economy, is larger than Italy's or any other troubled euro-zone nation.
The country's ample domestic savings have financed most of the debt so far, although analysts warn that a rapidly ageing population will erode those savings in coming years.
The BOJ, under a massive stimulus programme launched in April last year and expanded on Oct. 31, bought more JGBs than the government issued last month, stoking fears of debt monetisation.
(Editing by Mike Collett-White)