Moody's stripped Japan of its AAA rating on its foreign currency debt on Monday, but weak manufacturing and consumer sentiment edged up, keeping alive hopes the economic slide was beginning to ease.
Across the globe, European Central Bank policymaker Axel Weber said he believed the bank's efforts to boost the eurozone economy were sufficient unless conditions deteriorated markedly.
Stock markets fell in Asia and opened weak in Europe before turning mixed.
The standout market was India where the 30-share BSE index jumped 17 percent, the biggest single-day gain in almost two decades, after the ruling coalition secured a decisive election victory.
Moody's combined its cut in Japan's largely symbolic foreign currency rating with an upgrade by a notch to domestic government bonds. Unlike many of its peers in the top triple-A category, the world's No.2 economy relies mainly on domestic funding.
Japanese Finance Minister Kaoru Yosano said the rating hike on domestic government bonds reflected the Japanese market's ability to absorb greater issuance of such paper.
Moody's said the move would unify Japanese government debt at a new Aa2 level. It coincided with a survey of Japanese manufacturers that showed sentiment edging up from record lows, keeping alive hopes that a disastrous first quarter marked a low point for Japan's economy.
As governments from Beijing to Washington have committed trillions of dollars to kickstart their economies, growing debt and deficits have raised questions whether nations such as United States or Britain can keep their top credit grades.
"The move to lower Japan's foreign currency bond rating from Aaa opens the way for speculation about whether Moody's will take similar actions on other triple-A ratings," said Kenro Kawano, senior rates strategist at Credit Suisse in Tokyo.
Monday's monthly Reuters survey of Japan's top companies followed Friday's better-than-expected machinery orders data for April and a U.S. consumer survey showing confidence at its highest since last September's collapse of Lehman Brothers.
U.S. industrial output fell at a slower pace in April.
However, tentative signs of life came against a backdrop of deeper-than-feared first-quarter declines in the U.S. and euro zone economies and signs that companies around the world are still struggling with a slump in global trade and demand.
Friday's figures showed the euro area economy shrank 2.5 percent in January-March, dragged down by a 3.8 percent slump in Germany.
Japan, its fortunes inseparable from its export markets, is expected to report it contracted 4.2 percent in the first quarter when it releases its gross domestic product data on Wednesday.
A separate government poll of Japanese households also showed consumer sentiment improved in April, though most consumers remained pessimistic.
EU EFFORTS SHOULD BE SUFFICIENT
Many economists and policymakers are cautiously optimistic that sharp interest rate cuts, fiscal packages and bank bailouts will eventually succeed and that the world has probably seen the worst of the worst recession since World War Two.
Such confidence was apparent in Weber's comments.
"Unless things get noticeably worse, in my view, the package of (EU) measures decided until now is sufficient," Weber, who is also head of Germany's Bundesbank, told the Financial Times Deutschland.
The euro zone's trade balance swung into a surplus in March from deficits the previous month and a year earlier as exports dipped marginally more slowly than imports, data showed.
The unadjusted external trade surplus of the 16 countries using the euro came to 400 million euros ($541.7 million) against deficits of 1 billion euros in February and 2.3 billion in March 2008, the European Union's statistics office said.
Another ECB council member, George Provopoulos, said it will take time before economies recover and return to robust growth despite recent positive signs.
"Those so called 'green shoots' suggest the economy may be stabilising," Provopoulos said in a speech to the Organisation for Security and Cooperation in Europe (OSCE).
"It is important to keep in mind, however, that if stabilisation is indeed taking place, it is at a very low level of activity. It will take some time before our economies fully recover and grow at a robust pace," he added.
Weber also said in a speech the rate of economic decline in Germany would slow in coming months but it was too early to speak of recovery.
"I don't expect sustained positive growth rates before the middle of next year, which does not rule out that there might be a positive blip in the meantime," he said.
Analysts say markets could climb further on a sustained improvement in economic data due to the trillions of dollars spent on stimulus packages and the likelihood that companies will need to build inventories. Only then, will it be clear whether demand has returned.
