We are monitoring government policy to improve the non-performing loan (NPL) situation, and also how they deal with the anti-deflation policy, Mr Takahira Ogawa, head of S&PS Asian sovereign ratings team said.
If those policies were not effective or if the government did not take the move, we might have to downgrade in the future.
As for the timing...any time between now and a two to three year horizon, he said, declining to be more specific.
S&P last downgraded Japans domestic debt rating on April 15 by one notch to AA- the lowest of any country in the Group of Seven industrialised nations and three notches below S&PS Top rating. It said then the outlook was negative.
It was its third cut to Japans rating in two years.
Markets have been waiting for the government to come up with measures since the Bank of Japan (BoJ) announced unprecedented plans last week to buy shares directly from commercial banks, a step it said was aimed at preventing market volatility from further damaging the health of Japans banks.
Prime minister Junichiro Koizumi said last week the government would announce steps in October to speed up the disposal of sour bank loans.
Mr Ogawa said the BoJs move to buy stocks from banks would be ineffective unless it was followed by steps from the countrys financial regulator to clean up the banking sector.
It is very important for us to see whether the FSA (Financial Services Agency) will have a comprehensive and concrete solution in the near term, which at the moment, I dont think is happening, he said.
If that is the case, it was the wrong decision by the BoJ.
Financial markets showed no reaction to the S&P comments, with the yen steady around 122.55 per dollar, up from 123.23 in late New York trade.
Government bonds also took little notice, with the benchmark 10-year yield down 6.5 basis points for the day at 1.210 per cent. Yields move opposite to prices.On Friday, S&P affirmed Japans sovereign debt rating but criticised the central banks decision to buy shares from banks and said it might revisit Japans ratings as early as next month.
The announcement marked a sharp departure from remarks by the agency earlier this year indicating that no rating actions would be taken until next year.
In its announcement on Friday, S&P said it feared that the central banks stock-buying plan would prove a poor and ephemeral substitute for a comprehensive effort at reforming Japans crippled banking system.