The US ratings agency kept Japan's long-term credit rating at AA-minus and short-term rating at A-1-plus, but downwardly revised the outlook from "stable." A negative outlook normally means there is a one-third chance of a downgrade of the ratings in the next two years, the agency said.
S&P expects the costs related to the natural disasters, which devastated infrastructure, crippled manufacturing and unleashed a nuclear power plant crisis, "will increase Japan's fiscal deficits above prior estimates by a cumulative 3.7 per cent" of its gross domestic product through 2013, according to its report.
The move reflects "the potential for a downgrade if fiscal deterioration materially exceeds these estimates in the absence of greater fiscal consolidation," the report said.
Takahira Ogawa, S&P's director of sovereign ratings, aired his concerns about raising taxes to help finance reconstruction work, noting possible downside risks to the country's economic growth.
"Given the current macroeconomic situation, any radical tax hikes could possibly damage growth," Ogawa told a teleconference, referring to weak private consumption and business spending in Japan.
The tax increase, he also said, could only result in additional costs for the government as it would be forced to boost the economy with stimulus measures.
In January, S&P lowered Japan's long-term credit rating for the first time in nearly nine years, saying the government of Prime Minister Naoto Kan lacked a coherent approach to restoring the country's fiscal health, the worst among major developed economies.
Chief Cabinet Secretary Yukio Edano refused to comment in detail about the latest decision by S&P on Wednesday, calling it an "evaluation by a private-sector rating company."
But the top government spokesman also stressed at a press conference that Tokyo is "coherently pursuing the major principle of proceeding (with reconstruction) while maintaining (market) confidence in Japanese government bonds."
Finance Minister Yoshihiko Noda told reporters that the government needs to balance costly rebuilding work and fiscal discipline.
"Reconstruction is an important task, while fiscal restoration is also an inevitable course. Our basic position is enabling both" to be achieved, Noda said.
The move by S&P had little impact on financial markets, with yields on Japan's 10-year bonds remaining stable even after the late-morning announcement.
Kan's Cabinet on Friday adopted a draft extra budget worth some 4 trillion yen to pay the costs of the early phase of restoration work following the disaster without new debt issuance to finance it.