The agency said that while Japan's large savings pool was a stabilising factor, reconstruction costs from the March 11 quake and tsunami had raised pressure on the public purse, while the nuclear crisis added to uncertainty.

"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 an emailed statement.

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

Japan, the world's third largest economy, has one of the planet's lowest birth rates and highest life expectancies. Its population of 127 million started shrinking several years ago, reducing the labour pool and raising welfare obligations.

Fitch pointed out that Japan's gross government debt reached 210 percent of the size of its roughly five-trillion dollar economy late last year. It is the highest level among major industrialised nations.

Fitch stressed that Japan holds the world's second-biggest foreign currency reserves of over $1 trillion, and that most debt is held domestically, "which reduces the risk of self-fulfilling panic among debt holders".

However, Fitch said that Japan's government debt was projected to rise from 2007 to 2012 at a rate that it said was behind only Ireland and Iceland, both of which had experienced banking crises.

Fitch said Japan's household savings rate had been on a downtrend since the early 1990s, a trend it associated with population ageing.

Worsening the picture was Japan's massive tectonic disaster, which Fitch estimated would add two percent of GDP to government expenditure for reconstruction this year and next.

It also cautioned that "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."

"There is a further risk that prolonged delays in restoring infrastructure could lead more Japanese corporates to consider relocating their activities abroad, leading to a greater permanent loss of output from the disaster, although it remains too early to gauge this effect."

The agency said it would look closely at the centre-left government of Prime Minister Naoto Kan on how it handles public finances and the rebuilding of Japan's devastated northeastern coastal areas.

"The emergence of a stronger and more credible consolidation plan backed by credible political commitment to its implementation could see the ratings revert to stable outlook," it said.

"Failure to strengthen the commitment to fiscal consolidation, or the emergence of substantial additional fiscal or economic costs from the process of reconstruction post-disaster, could trigger a downgrade."

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