Moody's Investors Service on Monday raised Korea's sovereign credit rating by one notch to "Aa3."

"Korea's strong fiscal fundamentals enable a relatively large degree of policy space to cope with contingent domestic risks and external shocks," the ratings firm said in a statement. "Its government finance metrics are very well placed among all Aa-rated peers."

Aa3 is the fourth-highest credit rating out of Moody's 21 and the highest Korea has received so far. It is on a par with China and Japan and a notch above Korea's rating just before the 1997 Asian financial crisis.

"The Korean economy has demonstrated resilience to external shocks. It avoided a recession because of the global financial crisis in 2009 and rebounded strongly in 2010," Moody's claimed.

The rating is a welcome boost to Korea at a sensitive time when Japan is considering lowering the amount of a currency swap agreement designed to avoid a capital exodus by foreign investors in a financial crisis. The Korean government and businesses will also benefit from lower interest rates when borrowing money overseas, which could mean savings of up to US$400 million.

Moody's said it also raised Korea's credit rating because the country has the lowest ratio of debt to GDP among OECD member nations. The firm added that the risk of a sudden collapse in North Korea has diminished.

"It is rare for a country to get its credit rating raised at a time when Japan, France and Italy had their ratings slashed," said Eun Sung-soo of the Ministry of Strategy and Finance. "This suggests the world recognizes that Korea's economic fundamentals have risen to the level of the world's advanced economies."