Dagong Global Credit Rating Co., Ltd., a Chinese credit rating agency, on Monday said it will downgrade Japan's local currency sovereign credit rating from A+ to A and that of its foreign currency from AA- to A+.

Japan's new economic policy will lead to a further deterioration of the country's financial situation and rapid rises in its government debt-to-GDP ratio, said Dagong.

The agency forecast that Japan's deficit rates for the next two fiscal years will stand at 10.5 percent and 10.1 percent, respectively, as the country rolls out more stimulus measures.

Its government liability ratio, which reached the very high level of 239.1 percent by the end of 2012, is expected to grow by 10 percentage points annually in the short-term, said Dagong.

Japan's "unlimited" quantitative easing will exacerbate its sovereign credit crisis, Dagong said, forecasting a downward trend in the government's capacity to service debts.

The country's ultra-loose monetary policy will have a limited effect on boosting external demand, as the world's other major economies mired in depression will not tolerate a weakening Japanese yen for very long, Dagong added.

Dagong said it has maintained a negative outlook for Japan's local and foreign currency sovereign credit ratings in the next one to two years, as the country will likely suffer a long-term economic downturn.

Xinhua