Ratings agency Fitch has cut the country's sovereign credit rating, saying the government of PM Shinzo Abe has not taken enough measures to plug a budget gap left by its decision to delay a consumption tax rise.
Fitch cut Japan's sovereign rating by a notch to "A" on Monday, citing "uncertainty over the degree of political commitment" to reduce the country's debt and deficit.
"The government is set to unveil a new fiscal strategy in the summer of 2015. The details of the strategy will be important, but the strength of the government's commitment to implement it will be even more important and will only become clearer over time," said Fitch.
The move by Fitch follows a similar decision by rating agency Moody's, which downgraded Japan several months ago, and comes amid growing calls to bring the country's debt to sustainable levels.
The world's third largest economy continues to face many challenges - ranging from shrinking labor force on account of an ageing population to huge public debt. Japan's debt burden is one of the highest in the industrialized world amounting to more than twice its annual economic output.
Fitch estimates the total government debt-to-GDP ratio to rise to 244 percent of GDP by the end of 2015.
The prime minister's economic reform program, dubbed "Abenomics" - consisting of a combination of monetary, fiscal and structural policies, aimed to tackle the economic problems facing the country and put the economy back on growth trajectory.
But the Abe administration's decision in April 2014 to raise the consumption tax to 8.0 percent from 5.0 percent caused growth to falter, resulting in a brief recession.
The downturn prompted Abe to postpone a second sales tax rise to 10 percent to 2017. The hike was initially scheduled for later this year.
"Prospects for success in permanently lifting the economy's real and nominal GDP growth rates remain in doubt, two years after the launch of Abenomics," said Fitch, underlining that"progress on growth-enhancing structural reform remains limited."
The ratings agency also stressed that although corporate tax receipts in Japan are currently rising due to buoyant corporate profits, they are unlikely to be sustainable as profits are being boosted partly by the depreciation in the value of the Japanese yen on the back of Bank of Japan's quantitative easing (QE).
But the weak yen, for now, is giving a boost to Japan's exports. In March, the country's trade surplus stood at 229.3 billion yen ($1.92 billion, 1.78 billion euros), with exports up 8.5 percent from the same period last year and imports down 14.5 percent.
Furthermore, despite the economic challenges, the ratings agency noted that Japan has "exceptionally strong financing flexibility," as most of the nation's debt held domestically at low interest rates - a key reason why the country has avoided a Greek-style debt crisis and battles with international creditors.
sri/uhe (AFP, Fitch)