Construction worker stands in front of electronic board displaying graph showing movement of Japanese Yen's exchange rate against U.S. dollar in past year outside brokerage in Tokyo
A construction worker stands in front of an electronic board displaying a graph showing the movement of Japanese Yen's exchange rate against the U.S. dollar in the past year outside a brokerage in Tokyo February 22, 2011. Moody's Investors Service warned on Tuesday that it may cut Japan's sovereign rating if government policies fall short of comprehensive tax reform needed to bring ballooning public debt under control. The ratings agency said Japan, where the fifth prime minister since 2006 is facing mounting pressure to quit, needed stability at the top if it was to enact effective fiscal reform. Reuters

Moody’s Investors Service on Tuesday lowered Japan’s debt Aa2 rating outlook to negative from stable, saying political stalemate in the country will restrict efforts to tackle the nation’s debt.

“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 in a statement.

Moody’s downgrade of debt outlook for Japan will increase pressure on Prime Minister Naoto Kan as he struggles to obtain the support of lawmakers to reduce debt, including a sales-tax hike, Bloomberg reported.

“The government intends to introduce a comprehensive tax reform program in June. However, the divided Diet -- in which the opposition Liberal Democratic Party controls the Upper House -- and the intensifying level of political challenges to Prime Minister Kan together threaten to bog down such efforts,” Moody’s said.

Also, prime minister’s public approval rating declined to 20 percent in February, down 6 percentage points from January and lowest since he assumed the office in June 2010, an Asahi newspaper survey said on Monday.

Japan's gross domestic product (GDP) growth rate fell 1.1 percent in the fourth quarter of 2010 on annual basis, recording its first contraction in five quarters, according to the Cabinet Office.

With the nominal GDP of $5.474 trillion in 2010, Japan’s economy was pushed to third position in the world, behind the US and China.

“While Japan's real GDP growth of 3.9% in 2010 may prove to be the strongest among the major advanced economies, the apparent rebound was actually weaker in nominal terms,” the rating agency said.

Japan’s debt, the biggest among the advanced nations, is expected to reach $12 trillion by the end of fiscal year March 31, 2011, according to the Japan’s finance ministry.

Moody’s also indicated of possible downgrade citing failure to push comprehensive tax reform program, a shift in the current account into deficit, and a drop in the household savings rate into negative territory.

Last month, Standard & Poor’s had cut the Japan’s debt rating to AA-, the first rating cut by the company in nine years for Japan.

China Gdp Japan Japan