Today Moody’s downgraded Japan’s sovereign rating to Aa3. Guess what happened? Nothing much.

When S&P released it’s decision on Aug. 5 to cut the U.S. to AA+ with a negative outlook, the S&P 500 Index swung by at least 4.6 percent in the four trading days following the change and gold prices rose 5 percent. Japan’s markets today shrugged off the downgrade, with the Nikkei 225 average dipping 0.1 percent and the Asia Pacific index dropping 0.3 percent.

What’s the difference? Both country’s debt problems are hanging out for the world to see, there is no ambiguity over the numbers. Goldman Sachs Group Inc. economists said “Japan’s finances and debt are basically clear.” The Moody’s “downgrade does not come as much of a surprise”.

The uncertainty in the market in the US case concerns the politicization of fiscal and monetary policy and the expectations for improvement. The divide in Washington concerns core ideological positions, many of which come tied to spending mandates that are unsustainable (eh, hmm….Republicans on defense, Democrats on entitlements). More importantly, the incentives facing politicians give us no reason to expect reform.

And then there is the Fed. The central bank is an active player the political economy – certainly not a disinterested group of technocrats capable of managing the economy. A wonderful post by Kindred Winecoff of the International Political Science Department at the University of North Carolina reminds us of the political biases of the Fed and the real, predictable incentives that will influence Fed policy.

“The Fed is not only politicized; it is political. Every action taken benefits some group in society, often at the expense of another. Every policy choice has distributional consequences. Since the Fed is ultimately responsible for the health and well-being of the financial system, we can generally assume that the Fed will prioritize actions that benefit financial firms over other goals.”

I don’t know the political landscape of the current Japanese government, but the downgrade comes just before the Aug. 29th election. Makoto Noji, a bond and currency strategist in Tokyo at SMBC Nikko Securities Inc., thinks the downgrade is a postitive diciplining force on the political campaigns, making it “more difficult for the contenders to talk about party promises in manifestos….A candidate may have trouble attracting support unless he makes it clear that he’ll work to clean up government finances.”

While the downgrade might initiate weak changes in current campaign rhetoric – both here in the US and in Japan – the politics of the Federal Reserve will likely weigh much more heavily on the outcomes we experience in the mid to long run.