NEW YORK (CNNMoney) -- Standard & Poor's downgraded Japan Thursday because it expects the country's "fiscal deficits to remain high in the next few years" as it continues to deal with problems like debt, deflation and an aging population.
Wall Street had a muted reaction to the news at the start of trading on Thursday, though the mild gains were enough to push the S&P 500 to 1,300 for the first time since 2008.
The rating agency lowered Japan's long-term credit ratings to AA-minus from AA, and said the outlook is "stable." S&P noted that the county's fiscal pressures are offset somewhat by its "strong external position, and the flexibility afforded by the yen's international role."
The report mentioned one other positive -- Japan's gold and foreign exchange reserves of more than $1 trillion "are second only to China's."
However, Japan is still grappling with "persistent deflation" and a "fast-aging population," according to the report. More importantly, S&P stated that Japan's debt load will continue to grow into the next decade.
"The downgrade reflects our appraisal that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hits the country, and will peak only in the 2020s," the rating agency said.
S&P said that the Japanese government "lacks a coherent strategy" for dealing with these challenges, which will cause its "fiscal flexibility to diminish" going forward.
Going forward, S&P expects Japan's annual general government deficit to fall to 8% of gross domestic product by 2013, down from 9.2% in fiscal year 2010.
By comparison, the U.S. annual deficit is 10.6% in fiscal year 2010, according to S&P's calculation.
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||3.67%||3.62%|
|15 yr fixed||2.80%||2.76%|
|30 yr refi||3.65%||3.61%|
|15 yr refi||2.80%||2.76%|
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