Moody's Investors Service warned 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.
Japan's struggle to put a lid on the ever-rising public debt, which has ballooned to double the size of its $5 trillion (£3.09 trillion) economy, has triggered a Standard & Poor's rating cut and a slew of warnings from other rating agencies.
"Since (former PM Junichiro) Koizumi, there have been three Liberal Democratic Party prime ministers and one Democratic Party prime minister who have served for a year or less," Moody's senior vice president and regional credit officer Tom Byrne told a news conference in Tokyo.
"Effective fiscal reform most likely requires stability at the top levels of government."
Prime Minister Naoto Kan, who took office last June, has staked his career on fiscal reforms, including a rise in the 5 percent sales tax to fund bulging social security costs, and urged the opposition to join talks on the topic.
But the opposition has refused to come to the table and is instead piling pressure on the unpopular Kan to call a snap election by threatening to block budget-related bills, including one allowing the government to issue new bonds.
The dollar blipped up against the yen after Moody's changed the outlook on Japan's Aa2 rating to negative from stable, although government bond futures showed little reaction and maintained earlier gains.
City A.M. Reporter