The downgrading of ratings on Japan's long-term local and foreign currency credit by Standard & Poor's Corp. could hurt Japan's economy by raising long-term interest rates, the head of the government's Tax Commission said Friday.

"Confidence in Japan has been damaged due to the accumulation of long-term debts, and the downgrading would affect bond prices," Hiromitsu Ishi, chairman of the commission, said in a speech in Tokyo. "Long-term interest rates would rise, and the Japanese economy would suffer considerable damage."

The U.S. rating agency said Thursday it has lowered its long-term local and foreign currency credit ratings for Japan to AA-plus from AAA.

Finance Ministry calculations show the combined balance of the long-term debt of the country's central and local governments will come to 666 trillion yen as of the end of March 2002, up 24 trillion yen from the end of March 2001.

Ishi, meanwhile, said the government needs to immediately start preparing for fiscal reform even before achieving a full-fledged economic recovery.

"It is necessary to map out a scenario for fiscal reform even at a time when the economy is sluggish," said Ishi, adding that such measures as a fiscal reform law covering a 10-year period may be necessary.

Regarding a proposal to promote tax reforms on stock transactions, Ishi said he is opposed to reforming the dividend and capital gains tax system.

"The taxation system has had little effect on (declines in) stock prices," said Ishi. Factors including volatile U.S. stock prices have been affecting the Japanese market, he added.

Financial Services Minister Hakuo Yanagisawa said earlier this week that such tax reforms must be pushed to boost limp equities prices.

Lawmakers in the ruling bloc also agreed to discuss tax reforms such as allowing investors to carry over trading losses to the next year for possible income tax deductions.