TOKYO (AFP) – Ratings agency Moody's on Tuesday lowered its outlook on Japan's sovereign debt to "negative", voicing doubt its leaders will manage to contain the industrialised world's biggest debt.
The move will put further pressure on Japan's centre-left Prime Minister Naoto Kan, in power less than a year, with legislative gridlock in parliament threatening his reform agenda and imperilling his leadership.
Last month rival ratings agency Standard & Poor's cut Japan's credit rating for the first time since 2002, accusing the government of lacking a "coherent" strategy to ease its mountainous debts.
Moody's previously held a "stable" outlook on Japan's "Aa2" rating, the third highest on a scale of 19, and analysts said the change would probably lead to a downgrade.
"The rating action was prompted by heightened concern that economic and fiscal policies may not prove strong enough to achieve the government's deficit reduction target and contain the inexorable rise in debt, which already is well above levels in other advanced economies," Moody's said.
It warned that any inability by Tokyo to conjure a workable tax reform package with which to tackle spiralling debt could lead to further ratings action.
Japan has the industrialised world's biggest debt, at around 200 percent of GDP, after years of pump-priming measures by governments trying in vain to arrest the economy's long decline.
A rapidly ageing population, entrenched deflation and a feeble economy have made it hard for lawmakers to curb borrowing.
Moody's also cited doubts over "the ability of the ruling and opposition parties to fashion an effective policy reform response" to those issues.
Kan has seen his approval ratings tumble amid legislative gridlock over funding for his budget for the upcoming fiscal year as the opposition pushes for a general election.
The premier has set a target of achieving a surplus in the government budget by fiscal 2020 amid calls for revenues to be boosted by raising the five-percent consumption tax.
Hiroshi Watanabe, economist at Daiwa Institute of Research, said the Moody's outlook change "will likely to lead to a downgrade".
However, he added: "Japan has big fiscal debts but there is no immediate risk of collapse. We don't have to be too alarmed."
Moody's said the outlook horizon would "extend over the next year or two, depending on developments".
The rating action pressured Japanese banks, which are major government bond holders.
Mitsubishi UFJ Financial Group closed 3.61 percent lower in Tokyo trade, while Sumitomo Mitsui Financial Group tumbled 4.53 percent.
Japan has been able to fund its growing fiscal gap by raising money in the domestic market, with around 95 percent of the country's huge debt held via banks and pension schemes.
Its ability to finance its debt is therefore seen as sustainable for now and not near the level of eurozone states that have seen borrowing costs soar on fears for their fiscal integrity.
"The government can fund itself at a lower nominal cost than any other advanced economy," said Moody's.
But analysts warn pressures will increase as the population ages and dips into savings to spend in retirement.
Moody's noted that while a bond funding crisis is "unlikely in the near to medium term, pressures could build up over the longer term."
Kan, Japan's fifth prime minister in five years, has pledged to drive tough reforms through the divided parliament, to spur growth and reduce a public debt mountain twice the size of the $5 trillion economy.
But the premier, who took power last June, has struggled to tackle entrenched economic and social woes at a time when the conservative opposition controls the upper house and has threatened to block crucial budget bills.