Moody’s Investors Service downgraded Japan’s sovereign credit rating by one notch Monday, citing increased fiscal policy uncertainty.

The rating agency cut the government of Japan’s debt rating by one notch to A1 from Aa3. The outlook on the rating is stable. Moody’s says that the major reasons for the downgrade include increased uncertainty over its ability to reach its goals for reducing the fiscal deficit; uncertainty about the timing and effectiveness of policy measures that aim to enhance growth, amid deflationary pressures; and, increased risk of rising bond yields, and reduced debt affordability, over the medium term.

The new rating “reflects the government’s significant credit strengths, including a large, diverse economy with a strong external position, very high institutional strength and a very strong domestic funding base,” Moody’s says. And, it notes that the stable outlook reflects a balance between upside risks, including significant fiscal consolidation and a resumption of economic growth; and downside risks, including intensification of deflationary pressures and loss in economic momentum.

However, the downgrade comes amid concerns about the government’s strategy for simultaneously boosting growth and curbing deficits. Moody’s says that the government’s goal of reducing its primary deficit balance by half from its 2010 level by 2015 “will be difficult to achieve without more robust nominal GDP growth”; and, that the long-term target of returning to surplus by 2020 will be even more challenging.

And, it says that the current fiscal strategy also poses risks to fiscal consolidation and, over the longer-term, to debt affordability and sustainability. “Japan’s deficits and debt remain very high, and fiscal consolidation will become increasingly difficult to achieve as time passes given rising government spending, particularly for social programs associated with a rapidly aging population,” it notes.

Additional economic and fiscal reforms, which have yet to be proposed, will be needed for Japan to achieve its primary balance target in the second half of this decade, Moody’s says.

“It is not yet clear what further measures the government will choose, or be able, to take to address the deep-rooted structural problems of Japan’s economy, including broadening labor force participation, enhancing corporate governance and dealing with the challenges posed by demographic trends,” it says.