London-based credit rating agency Fitch IBCA, one of the major groups that rates the ability of countries and companies to pay off their debts, became the first to say that Japan's foreign-currency bonds were no longer of triple-A class.

Citing banking problems, policy paralysis and mounting public debt, Fitch IBCA said it was lowering the rating to AA-plus.

The news was met with some scepticism and a belief that its impact was more psychological than practical.

Japan is the world's largest creditor, with overseas assets held by both government and private sector totalling 124 trillion yen ($932 billion).

With industrial might rivalled only by the United States, it also brings in huge amounts of foreign currency earnings each year, backed by a trade surplus thattotalled 11.44 trillion yen for the 1997-98 fiscal year.

"In terms of national debt, it's hard to imagine what it means, because Japan doesn't issue any external debt," said Peter Morgan, economist at HSBC Securities.

"The risk of fault is still infinitesimal... But you can hardly say that the country belongs to the select creme de la creme of borrowing countries."

Fitch IBCA acknowledged that the risk to investors remains very small but "can no longer be entirely ignored".

It said Japan has three main features that put it below the most creditworthy nations:

* A weak and deteriorating banking system.

* Hesitant policy responses to economic challenges.

* A mounting public debt which will soon be in a similar league to that of Belgium, Italy and Greece.

The news could hardly have come at a worse time for the embattled Japanese government.

Prime minister Keizo Obuchi is due to meet president Bill Clinton on Tuesday and had hoped to show that Japan was finally taking long called-for action tohelp its banking system restructure.

Even as he flew to New York, however, the plan was appearing to come unstuck as opposition politicians said there was no firm deal.