Ratings agency Moody's said Tuesday it may lower Japan's sovereign debt rating in three months, voicing doubt its leaders will be able to contain the industrialised world's biggest debt.

The move will put further pressure on Prime Minister Naoto Kan, under fire for his handling of the response to the March 11 earthquake, tsunami and nuclear disaster and facing the threat of a no-confidence motion this week.

"The review has been prompted by heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government's ability to fashion and achieve a credible deficit reduction target," the agency said in a statement.

"Without an effective strategy, government debt will rise inexorably from a level which already is well above that of other advanced economies."

Moody's assigned a "negative" outlook in February on Japan's "Aa2" rating, which analysts said would probably lead to a downgrade.

"Although a (Japan government bond) funding crisis is unlikely in the near- to medium-term, pressures could build up over the longer term, and which should be taken into account in the rating, even at this high end of the scale," Moody's said.

"Moreover, at some point in the future, a tipping point could be reached, and at which the market would price in a risk premium to government debt."

The Moody's announcement follows action by Fitch Ratings on Friday, which said it was assigning a negative outlook to its AA- rating. Standard & Poor's also has a negative outlook on its AA- rating.

"This should be interpreted to mean that the market is urging the Japanese government to bring its fiscal condition back to health," Economy Minister Kaoru Yosano told reporters.

"I think that the market in particular is saying that we should quickly move ahead with things like a comprehensive overhaul of the tax and social security systems."

Japan has the industrialised world's biggest debt, at around 200 percent of GDP, after years of pump-priming measures by governments trying in vain to arrest the economy's long decline.

A rapidly ageing population, entrenched deflation and a feeble economy have made it hard for lawmakers to curb borrowing.

Moody's cited the "much larger than initially expected" costs of the quake-tsunami and nuclear emergency, which it said were "magnifying the adverse effects imparted by the global financial crisis from which Japan's economy has not completely recovered".

Kan, who has been Japan's premier for less than a year, saw his approval ratings slip below 20 percent shortly before the March 11 calamity, which sparked the world's worst nuclear crisis since Chernobyl and threw the country back into recession.

Japan's economy contracted sharply on the impact of the disaster. The drop was equivalent to a 3.7 percent fall on an annualised basis.

"In addition, the fiscal consequences of the earthquake are proving much greater than initially expected," Moody's said. "Preliminary indications are that the direct costs to the government's budget may amount to around two percent of GDP, not including costs that may arise from Tokyo Electric Power's liabilities from the devastated Fukushima Daiichi Nuclear Power Station.

"This would be twice as great as those of the 1995 Kobe earthquake."

But Taro Saito, senior economist at NLI Research Institute, questioned the timing of Moody's announcement, arguing that Japan has been moving towards fiscal reforms such as raising sales tax.

"This move by a rating agency is not new, so I don't think this alone would adversely affect the market," he said.

Japan's huge government debt -- already twice the size of its roughly five-trillion dollar economy -- is set to grow with reconstruction costs from the disasters.

The country has one of the world's lowest birth rates and highest life expectancies. Its population of 127 million started shrinking several years ago, reducing the labour pool and raising welfare obligations.

Japan has been able to fund its growing fiscal gap by raising money in the domestic market, with around 95 percent of the country's debt held domestically via banks and pension schemes.

But analysts warn pressures will increase as the population ages and dips into savings to spend in retirement.

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