UPDATE 1-S&P affirms Japan at AA, fiscal pressure manageable

* S&P affirms Japan sovereign ratings at AA, outlook stable

* Says Japan can withstand rising pressure from stimulus (Adds S&P details, background on fiscal position)

TOKYO, July 1 (Reuters) - Standard & Poor's affirmed Japan's AA credit rating on Wednesday, with a stable outlook, saying the world's second-largest economy could withstand rising fiscal pressure from government stimulus measures.

The rating agency said the stable outlook was based on its opinion that Japan's high level of fiscal deficits would not last long and that its ample liquidity and low interest rate environment meant it would manage the increase. [ID:nWLA7993]

"When the Japanese economy stabilises, we expect the fiscal deficits to return gradually to the levels seen prior to the global financial crisis and ensuing recession," S&P said.

"As such, progress in fiscal consolidation and effective public sector reforms will enable Japan to remain in the current rating level."

S&P rates Japan's long-term local and foreign currency debt AA, the third-highest ranking in investment grade, and its short-term debt A-1-plus.

It said Japan's ratings were supported by its strong net external asset position but noted that the nation was suffering from a political stalemate that could harm fiscal consolidation and structural reforms.

Moody's Investors Service cut Japan's foreign currency credit rating to Aa2 from AAA in May but upgraded its local bonds to Aa2 from Aa3, saying the local market was able absorb new borrowing from the most indebted government in the industrialised world. [ID:nT185687]

The value of outstanding Japanese government debt is more than 170 percent of gross domestic product.

The government this week set a record 52.7 trillion yen ($544 billion) ceiling on budget spending for the fiscal year starting next April, up from 51.7 trillion yen in the main 2009/10 budget, in a move which could further strain its fiscal condition. [ID:nT72072].

The government already plans to sell a record 44 trillion yen of new bonds in the current fiscal year to March 2010 to finance its huge stimulus packages.

It also looks increasingly likely to issue more bonds after the government said on Wednesday that tax receipts for the past financial year fell short of target, leaving the nation's final balance in the red for the first time in seven years. [ID:nT354905] ($1=96.81 Yen) (Reporting by Charlotte Cooper; Editing by Edwina Gibbs)