Fitch Ratings lowered Japan's credit ratings on Tuesday citing rising risks to the sovereign credit profile due to higher public debt ratios.
The long-term foreign and local currency Issuer Default Ratings were lowered to 'A+' from 'AA' and 'AA-' respectively. The Negative outlook on ratings was maintained.
"The country's fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk," Andrew Colquhoun, Head of Asia-Pacific Sovereigns at Fitch.
The agency warned that a lack of new fiscal policy measures aimed at stabilizing public finances amid continued rises in government debt ratios could lead to a further downgrade.
Finance Minister Jun Azumi did not comment on the rating downgrade. He told reporters the government will try to pass tax reforms to improve the nation's finances.
Japan has 'Aa3' rating from Moody's and 'AA-' from S&P.
According to Fitch, gross general government debt of Japan is likely to reach 239 percent of GDP by end-2012, the highest for any Fitch-rated sovereign. Moreover, Japan's Fiscal Management Strategy envisages declines in the government debt/GDP ratio only from fiscal year 2021.
The rating agency viewed this as a slow pace of consolidation given the scale of Japan's debt. Moreover, the government's plan to hike the consumption tax to 10 percent by fiscal 2015 remains highly politically controversial.
Meanwhile, the factor that supports the rating is the ability to retain exceptional financing flexibility, it said. Further, funding flexibility is underpinned by the role of the broader public sector in channeling savings to the sovereign.
Further, Fitch considers that this private sector savings behaviour may itself contribute to the economy's persistent deflationary equilibrium. The economy experienced deflation since 2001 and real GDP growth lags high-income peers. Strong private savings contribute to the country's persistent current account surpluses.
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