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TOKYO (Reuters) - The stand-off between Japan's government and opposition parties is a concern as it has stalled important legislation needed to fund government spending, credit rating agency Moody's Investors Service said on Friday.
Japanese policy making has ground to a halt since the end of the regular session of parliament last month due to a standoff between the government and the opposition.
This has delayed a bill that is crucial to funding the budget for the current fiscal year and could delay the government's response to a slowing economy.
Japan's politicians still have some time to bring down debt as government bond yields are likely to remain low and the current account balance is likely to remain in surplus for the time being, Moody's senior vice president and regional credit officer Tom Byrne told reporters.
"Confidence in Japan's government is tenuous," Byrne said.
"Tight Japanese government bond yields are likely to remain, and this gives the authorities some time to reduce deficits."
Moody's rates Japan at Aa3, three notches below the top AAA rating, with the outlook at stable.
Legislation needed to sell bonds for this fiscal year's budget is in limbo. Opposition parties, who control the upper house and can block legislation, have been stalling to force the government to dissolve the lower house and call an election.
Without the bill, the government could run out of money by the end of November.
Moody's will monitor these developments, but there are several factors that support Japan's public debt and the rating agency's stable outlook, Byrne said.
Japan has already been hit by a string of credit downgrades because of concerns that it was not doing enough to curb its debt burden, the world's largest at twice the value of its annual economic output.
Still, Japanese investors' home bias for JGBs has increased, said Byrne, who is visiting Japan for the International Monetary Fund's annual meeting.
Domestic investors hold 91.3 percent of outstanding government debt, according to Bank of Japan data.
Japan's holdings of investments overseas means that the current account balance is likely to remain in surplus for the next five years, which also supports Japan's public debt burden because it means Japan is a net creditor to the world, Byrne said.
The Bank of Japan, like central banks in the United States, Europe and Britain, has been expanding its balance sheet by purchasing government debt to keep yields low and support economic growth.
Byrne said he underestimated how active the BOJ would be with its asset purchases, which is a positive for Japan's outlook.
However, central bank purchases of government debt is not the ultimate solution to the current economic malaise and that governments need to take steps to boost growth, Byrne said.
Editing by Simon Cameron-Moore