Ratings agency Moody's on Tuesday said it had downgraded Toyota Motor and its affiliates by one notch to Aa3, citing concerns for its profitability against a strong yen and materials costs.

It said the ratings remain on review for possible further downgrade, given that they incorporate one notch of support from Japan's banks and government, which are also under review for a possible downgrade.

The latest rating is fourth-highest on Moody's scale of 19.

"Toyota's profit recovery in the period towards (financial year ending March 2013) will not be as strong as preferred because of its weakening market shares in various regions worldwide, the strong yen (now 80-85 yen per dollar), and high raw material prices," Moody's said.

A strong, fluctuating yen level makes Japanese exporters less competitive, eroding overseas earnings when repatriated and making it more expensive to export to other countries.

Toyota is a bigger exporter than its Japanese peers.

The Japanese automaker's "competitive strength will remain under pressure for a prolonged period in view of challenging market conditions", Moody's said.

The ratings agency had threatened to downgrade to its long-term credit rating for Toyota in April after Japan's devastating earthquake and tsunami hit auto parts supply chains and forced the closure of manufacturing plants.

However, the agency said the new rating reflected "the faster-than-expected recovery in Toyota's production levels following supply chain disruptions and power shortages because of the March 11 earthquake."

Earlier this month, Toyota said it expected net profit in this fiscal year to drop 31 percent on-year to $3.5 billion on a strong yen and the effect on production of the March disaster.

The automaker said it expected to stage a recovery in the second half as supply problems caused by the earthquake fade, but warned the current strength of the local currency made domestic production too expensive.

Toyota is also recovering from the impact of millions of safety recalls last year.

It sold 8.42 million vehicles globally in 2010, just ahead of General Motors' 8.39 million, but analysts say the impact of the March disasters will see it cede its position as the world's biggest carmaker.

Standard & Poor's cut its rating on the auto giant in March before the earthquake and tsunami.