The agency had warned in May that it may downgrade Japan's Aa2 rating due to heightened concerns about its faltering growth prospects and a weak policy response to deal with a bulging public debt, now twice its $5 trillion GDP.
"Several factors make it difficult for Japan to slow the growth of debt-to-GDP and thus drive this rating action," Moody's said in a statement, adding that the March 11 earthquake and ensuing nuclear crisis had exacerbated Japan's problems.
Still the ratings agency said the outlook was now stable given the "undiminished home bias of Japanese investors and their preference for government bonds, which allows the government's fiscal deficits to be funded at the lowest nominal rates globally."
The yen moved little on the news, trading at around 76.7 against the dollar.
The downgrade brings Moody's rating for Japan in line with rival agency Standard & Poor's, which cut the country in January to AA, the fourth highest on its scale.
Persistent deflation and slow growth has shackled Japan's economy for years, reducing tax revenue available to the government, which has grown to rely on debt issuance to finance a large portion of its budget.
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