Dagong Global Credit Rating Co on Monday downgraded the local currency sovereign credit rating of Japan from A+ to A, and its foreign currency rating from AA- to A+, with a negative outlook.

"The new economic policies of the Abe government will critically exacerbate the fiscal situation and cannot solve the entrenched problems constraining national wealth creation capability," Dagong said in a report.

"The economy will remain in a prolonged slump whereby the risk of the outbreak of a sovereign credit crisis rises," said the Beijing-based agency.

The key reasons cited for the downgrade are the recent recession, and the new economic policy of the Abe government that failed to solve the structural problems that restrict economic growth.

Affected by the decline of domestic investment and weakened external demand, Japan's GDP fell consecutively in the last three quarters of 2012.

The new economic policies that focus on an extremely loose monetary policy without a defined duration, as well as the substantial fiscal stimulation program were launched after the Abe government took office.

Dagong believes that although these two aggressive measures can maintain the mild economic growth of Japan in the short term, they cannot solve the structural problems restricting national wealth creation capability, such as the self-enclosed economic system, a rigid corporate organizational structure and the entrenched problem of the ageing population.