By Stanley White
TOKYO, Feb 18 (Reuters) - Ratings agency Standard & Poor's remained cautious about Japanese Prime Minister Shinzo Abe's policies to stimulate growth and end deflation, and maintained its negative outlook on Japan's debt.
The ratings agency said in a statement on Monday that it will take time to determine whether Abe's policies will be effective.
The measures could eventually lead to a reflation in Japan's economy, but public finances are likely to remain weak even if the government goes ahead with its plan to raise the 5 percent sales tax, the ratings agency said.
S&P reaffirmed its AA minus rating on Japan and maintained a negative outlook, meaning there is at least one-in-three chance of a downgrade in the coming fiscal year.
'We believe the measures adopted by the new Abe administration at the beginning of its term will be critical if it is to arrest what we see as a prolonged decline in Japan's sovereign credit standing,' the ratings agency said in a statement.
'Even with full control of parliament, it will take time to see whether the Abe administration's policies are effective.'
Abe led his Liberal Democratic Party (LDP) back to power in December with promises of aggressive monetary easing and fiscal stimulus to end nearly 20 years of deflation and stop-start growth.
The ruling LDP lacks control on the upper house of parliament, which means opposition parties can still block some legislation.
Since taking office in December, Abe has compiled a stimulus package that is the country's biggest spending push since the global financial crisis in an effort to kickstart the economy. The Bank of Japan also agreed to adopt a 2 percent inflation target that Abe has been calling for and commit to 'open-ended' easing from next year to help push up prices and stoke demand.
Increased fiscal spending has raised concerns that Japan's debt burden, which is already the worst among major economies at more than twice the size of its $5 trillion economy, could deteriorate even further.
Japan's balance of payments position is still strong as it is the world's largest net external creditor and its foreign exchange reserves are the second-largest in the world after China's holdings, S&P said.
However, Japan's external position has weakened somewhat as it imports more energy to offset the closure of nuclear power plants, the ratings agency said.
Japan's fiscal budget deficit is likely to remain around 10 percent of gross domestic product for the fiscal year starting in April, showing that public finances will remain weak, S&P said.
S&P could cut Japan's rating if it determined that government policies to end deflation would not be effective or if the government's real funding costs increased, the statement said.
On the other hand, if Abe's policies successfully fuel economic growth and an increase in tax revenue, Japan's sovereign rating could stabilise this year, S&P said.
S&P's AA minus rating for Japan is three notches below the top AAA rating.
(Editing by Shri Navaratnam) Keywords: JAPAN ECONOMY/S&P
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