Standard & Poor's on Monday affirmed Japan's sovereign debt rating at AA- while maintaining a negative outlook and warning that the country's fiscal flexibility will likely continue to diminish.

"The sovereign ratings on Japan are supported by the country's ample net external asset position, relatively strong financial system, and diversified economy," S&P said in a statement.

"In addition, the yen is a key international reserve currency," it said.

But the agency kept Japan's debt rating on a negative outlook, citing a yawning fiscal deficit, large public debt, prolonged deflation and an ageing and shrinking workforce.

Japan's sovereign ratings are also constrained by the government's weak policy foundations, the agency said.

Takahira Ogawa, the director of sovereign ratings at the risk evaluator, said the agency did not downgrade the ratings partly because new debt issuance related to quake-reconstruction had been smaller than his original forecast.

But Japan must more than double its five percent consumption tax to improve its fiscal health, he said during a teleconference with reporters.

Prime Minister Yoshihiko Noda has been pushing to increase the consumption tax to 10 percent by 2015 in an effort to slow the increase of Japan's debts, which stand at more than 200 percent of GDP.

Japan's divided parliament - with opposition parties controlling the upper house - also poses a challenge as it decreases the government's ability to implement its policies, Ogawa said.

"As long as the split remains, (whichever) party is in charge...won't make much difference in terms of the nation's ability to quickly enact bills," he said.

channelnewsasia.com