Fitch cut Japan's sovereign credit status on Tuesday to the lowest level among global ratings agencies as a political stalemate dims the chance that the country can curb its snowballing debt.
Fitch Ratings cut Japan's long-term foreign currency rating by two levels from AA to A plus, the fifth highest investment grade. It cut the more important local currency rating by one notch from AA minus to A plus. Both were given a negative outlook.
Fitch warned further downgrades were possible unless the government takes new fiscal policy measures to stabilize public finances and its ratio of debt to GDP.
The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios, Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch said in a statement.
The country's fiscal consolidation plan looks leisurely, relative even to other fiscally challenged high-income countries, and implementation is subject to political risk.
Fitch's A plus local currency rating for Japan is the one most closely followed by investors because the government's debt is largely funded by domestic investors, who are backed by about 15 trillion dollars in household savings.
Bank of Japan data shows that domestic investors held 93% of government debt as of December.
The Fitch rating is one notch below its rival ratings agencies. Moody's Investors Service rates Japan Aa3 with a stable outlook. Standard & Poor's rates Japan at AA minus with a negative outlook.
All the ratings are broadly in the middle of the investment grade range of ratings. S&P cut Japan's ratings in January last year, saying Japan lacked a convincing plan to deal with its debt and also citing political risks.
Japan's debt burden, at twice the size of its 5 trillion economy, is by far the worst among industrialized countries. It has been built up as the government tried to stimulate the economy during two decades of sluggish growth and deflation.
Fitch said Japan's gross general government debt is projected to rise to 239% of GDP by the end of 2012, the highest of any Fitch-rated sovereign debt.