Fitch Ratings downgraded Japan's credit rating by one notch after the government failed to take steps in this fiscal year's budget to offset a delay in a sales tax increase, the agency said on Monday.
Fitch cut its rating on Japan by one notch to A, which is five notches below the top AAA rating. The outlook is stable.
"One reason why Japan is at single A, which is a low rating, is the fragility around the baseline case for the public debt," said Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch.
"The tolerance to fluctuations in growth and interest rates is low."
The yen JPY= briefly fell to 119.42 per dollar from 119.17 before the announcement but then pared its losses to trade around 119.30 versus the greenback.
A plan to lower the corporate tax rate also increases uncertainty about whether the government will generate enough revenue to address its debt burden, Fitch said in a statement.
Fitch's move follows a similar downgrade by Moody's Investors Service late last year and could pressure the government to take tough measures in a fiscal discipline plan that is due sometime around June.
The government's use of stimulus spending, disappointing economic growth and worries that corporate profit growth is not sustainable are also negative for Japan's rating, Fitch said.
In December, Moody's downgraded Japan to A1, which is one level above Fitch's rating, due to a delay in the sales tax increase.
Standard & Poor's has an AA- rating on Japan, which is three notches from the top rating of AAA. S&P's rating on Japan has a negative outlook, meaning a downgrade is possible.
Abe's decision late last year to delay a sales tax hike to 10 percent from 8 percent that had been scheduled for this year has made it difficult to eliminate the primary budget deficit in fiscal 2020, an important fiscal consolidation target.
The primary budget deficit excludes debt servicing costs and income from bond sales.
Some government advisers has said the updated fiscal discipline plan in June should focus more on lowering the ratio of debt to gross domestic product.
Focusing more on the debt-GDP ratio is not a major problem, but the government needs to make sure its economic forecasts are realistic, Colquhoun said.
Japan's public debt, at twice the size of its economy, has the worst debt-to-GDP ratio of any industrialized country.
The country's ample domestic savings have financed most of the debt so far, although analysts warn that a rapidly ageing population will erode those savings in coming years.
Some economists worry that the Bank of Japan's purchases of government debt via its quantitative easing could make the government complacent on fiscal policy because yields are kept very low, or in some cases even go into negative territory.
Join the Conversation