Japan's debt burden is the worst among industrialized economies, and it may not be able to postpone drastic spending cuts and aggressive tax hikes much longer as Europe's debt crisis threatens the global economy.
"We would also consider lowering the long- and short-term ratings if the government's debt trajectory remains on its current course or begins to erode the nation's external position," S&P said in a statement.
"On the other hand, we may revise the outlook to stable if the government were to implement robust and sustainable fiscal consolidation."
S&P and Fitch both rate Japan AA- with a negative outlook. Moody's Investors Service ranks Japan at the same level, at Aa3, but has a stable outlook.
All three agencies rate Japan three notches below the top AAA rating.
Japan's rating could fall if real gross domestic product growth per capita drops below S&P's forecast of 1.2 percent, according to the statement.
Late last year the ruling Democratic Party agreed a timetable on rises in the sales tax to pay for welfare spending. It said it would increase the 5 percent sales tax to 8 percent in April 2014 and then to 10 percent in October 2015.
Prime Minister Yoshihiko Noda needs opposition votes to pass the tax hike in a divided parliament, but his public approval ratings are sinking and the opposition are refusing to cooperate as they look to force an election.
Higher taxes could help reduce revenue shortfalls, but that wouldn't change Japan's aging population, which continuously pushes up welfare costs, S&P said.
Japan's sovereign ratings are also constrained by the government's weak policy foundations, the ratings agency said.
Even if the sales tax rises to 10 percent, that would not be enough to lower the ratio of public debt to gross domestic product, which is the worst among industrialized nations and almost twice the size of its $5 trillion economy, government estimates show.
Japan's rating does draw support from its ample holdings of external assets in its foreign exchange reserves and its current account surplus, S&P added.