Ratings agency Fitch on Friday cut its outlook on Japan's sovereign debt to negative from stable, warning that the massive cost of a March earthquake and tsunami and the still-unknown bill for the clean-up after the nuclear disaster would put added strain on the country's already shaky public finances.

The yen fell against the dollar and the euro immediately after the move, which follows a similar downgrade by Standard & Poor's last month.

Fitch affirmed its AA minus local currency rating, its fourth highest and the same level as S&P's but one notch below Moody's Aa2. After Friday's move by Fitch, all three now have negative outlooks for Japan.

"Japan's sovereign credit-worthiness is under negative pressure from rising government indebtedness," said Andrew Colquhoun, head of Fitch's Asia-Pacific Sovereigns team in a statement.

"A stronger fiscal consolidation strategy is necessary to buffer the sustainability of the public finances against the adverse structural trend of population ageing."

Responding to the news, the Japanese government offered assurances that it would continue efforts to bring public finances back under control.

"On the one hand, Japan is working hard to rebuild. On the other hand, it is a given that it works hard on fiscal soundness," Deputy Chief Cabinet Secretary Tetsuro Fukuyama told reporters at a Group of Eight summit in the northern French seaside town of Deauville.

 

Analysts played down any potential market impact of the latest downgrade, saying it simply affirmed the widely held view of the challenges facing Japan.

"There is nothing surprising in Fitch's action," said Katsuyuki Tokushima, chief fixed-income strategist at NLI Research Institute in Tokyo. "It rather seems belated given the dire political situation in Japan. Fitch's outlook downgrade is unlikely to impact bond and credit markets."

While noting that government spending on rebuilding the quake-ravaged areas could boost gross domestic product in 2011 and 2012, Fitch singled-out the potentially huge costs of cleaning up after the Fukushima plant disaster as a serious risk.

"There is considerable downside risk for the public finances from the still-unknown cost of cleaning up the Fukushima nuclear plant, while delays in restoring power supplies could lead Fitch to revise down its 2011 growth forecast from 0.5 percent.

Japan's public debt, already twice the size of the $5 trillion economy, is set to swell as the country faces reconstruction costs following the March 11 earthquake and tsunami that killed around 24,000 people and triggered the world's worst nuclear accident since Chernobyl.

However, the country's deepest crisis since World War Two has not healed rifts between the government and the opposition, whose majority in the upper house stands in the way of fiscal reform.

Fitch said Japan's public indebtedness was also rising sharply, at a pace trailing only Ireland and Iceland, "both of which have experienced systemic banking crises."