The cut to Japan's debt rating outlook by Standard & Poor's escalated pressure on Prime Minister Yukio Hatoyama to rein in spending and consider raising taxes to reduce the nation's borrowing.
S&P on Tuesday lowered the outlook on Japan's AA sovereign credit rating to "negative" because of diminishing "flexibility" to cope with the world's largest public debt and concern about the lack of a plan to rein in budget deficits.
The move highlights concern that the shrinking Japanese population and stagnating economy will erode a savings pool that has kept yields on benchmark 10-year bonds below 2 percent for 11 years. At the same time, because domestic investors hold more than 90 percent of Japan's debt, there may be little risk of an immediate increase in borrowing costs that would force Hatoyama and Finance Minister Naoto Kan to act more quickly.