Japan's devastating earthquake and tsunami may accelerate the point at which investors potentially lose confidence in the country's finances, Moody's Investors Service said on Monday.

The agency noted Japan is still able to finance its deficits at exceptionally low cost, but warned that investors could at some point demand higher yields on government bonds.

The earthquake may have shifted such a potential tipping point a bit forward, unless Japan's political parties are galvanized by the crisis to also address the country's long-term fiscal challenges, Moody's lead analyst Tom Byrne said in a statement.

Moody's, which already had Japan's Aa2 sovereign rating on negative outlook before Friday's quake, said the disaster does not make a fiscal crisis in Japan imminent. Financing of government deficits, it argued, will continue to be provided by the country's deep and liquid debt markets at low cost.

We think that Japan has ample domestic savings to accommodate increased government funding needs, Byrne said.

However, the immediate fiscal costs of the earthquake to the central and regional governments will likely halt any progress in reducing the large budget deficits that resulted from the global financial crisis and recession, he added.

Moody's sees estimates of the quake's economic damage increasing in the weeks and months ahead. But it also expects reconstruction spending will be a very effective and justifiable fiscal stimulus.

Such expenditure will likely offset the economic impact from immediate losses in production and demand, Byrne said.

(Editing by Leslie Adler)

Japan Tsunami Quake