Confidence in the Japanese economy took another blow yesterday when credit rating agency Moody's reduced its outlook for the country's sovereign debt rating from stable to negative.

The controversial decision hit Japan's already bruised currency, as well as equity and bond markets. Meanwhile US president, Mr Bill Clinton, called on Japan to introduce new measures to stimulate its economy.

Moody's said it had lowered its outlook on Japan's AAA-rated sovereign debt not because it was putting Japan on review for possible downgrading, but there were factors which could lead it to review the country's rating over the next two years.

The yen touched Y135 against the US dollar for the first time in more than six years, before the Bank of Japan intervened to support the currency.

The Nikkei 225 average fell more than 1 per cent, closing at 15,517. Bond prices fell, with the yield on the benchmark 182nd 10-year bond up from 1.585 per cent to 1.685 per cent.

Moody's complained of Tokyo's failure to address the country's serious economic problems, including its deteriorating fiscal deficit and growing deflationary pressures, which risked aggravating structural weaknesses in the financial sector. Japanese officials were surprised and vowed to stimulate the economy. "We will deal with the current state of the economy with a sense of crisis," said Koichi Kato, secretary-general of the ruling Liberal Democratic Party.

Standard and Poor's and IBCA, two other rating agencies, said they had no intention to downgrade Japan's sovereign rating. Moody's indictment comes on the heels of unusually sharp criticism by a leading Japanese businessman of the government. On Thursday Norio Ohga, chairman of Sony, lambasted the prime minister, Ryutaro Hashimoto, for his handling of the economy.

President Clinton urged Japan to take bold moves to stimulate its flagging economy, calling on outsiders to be "respectful but firm" in offering such advice.

The president, in remarks to journalists after his return from Africa, also stressed that the government bureaucracy in Japan had to break with policies that were once appropriate but no longer relevant.

"We have urged aggressive action because we want the Japanese economy to grow," Clinton said.

"We think the Japanese economy is the key to stability and growth in Asia."