Ratings agency Fitch on Friday cut its outlook on Japan's sovereign debt to negative from stable, warning that the massive cost of a March earthquake and tsunami would put added strain on the country's already shaky public finances.
The yen fell against the dollar and the euro immediately after the move from Fitch, which follows a similar downgrade by Standard & Poor's last month.
Fitch affirmed its AA rating on Japan.
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 a statement.
A stronger fiscal consolidation strategy is necessary to buffer the sustainability of the public finances against the adverse structural trend of population aging.
Japan's public debt, already twice the size of the $5 trillion economy, is set to swell as the country faces reconstruction costs following the March 11 earthquake and tsunami that killed around 24,000 people and triggered the world's worst nuclear accident since Chernobyl.
However, the country's deepest crisis since World War Two has not healed rifts between the government and the opposition, whose majority in the upper house stands in the way of fiscal reform.
Fitch said Japan's public indebtedness was also rising sharply, at a pace trailing only Ireland and Iceland, both of which have experienced systemic banking crises.
(Writing by Alex Richardson; Editing by Neil Fullick)