HONG KONG (Reuters) - Japan's credit quality is slowly sinking but not to an extent that could trigger an immediate downgrade, credit rating agency Standard and Poor's said on Tuesday.
"Japan's rating of AA is still valid but the Japanese government credit is slowly sinking," Takahira Ogawa, S&P director for sovereign and international public finance ratings told Reuters Insider in an interview.
"The risk of default is slowly increasing but not to the extent which will change anything at this point in time," he said.
Japan's outstanding public debt is the largest among industrial nations, approaching twice the size of its gross domestic product, although most of it is held by domestic investors.
Ogawa said Prime Minister Naoto Kan's win in a ruling party leadership race indicates a continuation of the government's fiscal and macroeconomic policies, which is not necessarily beneficial to ratings.
"There is no reason to be optimistic simply because of the continuation of the policy of the previous government because the DPJ government has the tendency to take populist measures," he said.
Rival rating agency Fitch Ratings warned in July that a delay in a credible plan before year-end for fiscal consolidation would increase the risk of a rating downgrade.
Ogawa sounded a similar warning note.
"We see some more degrading of the government's credit quality in the next year or two," he said.
Standard & Poor's has a negative outlook on Japan's rating which indicates the potential direction of the rating in the intermediate term which is typically six months to 2 years.
Prime Kan will keep his job after an unexpectedly strong victory in a ruling party leadership vote but must now strive to unify his party and forge deals with the opposition to pass laws in a divided parliament.
"I don't see the ballot result as a key near-term credit rating driver," Andrew Colquhoun, the Fitch ratings sovereign analyst told Reuters.
But he added: "If the DPJ splits, then there would be more political uncertainty which would make it more difficult to see a fiscal plan happening in the medium term -- which would tend to be negative."
Fitch rates Japan's foreign currency debt AA and its local currency debt at AA-minus, with a stable outlook.