But Vincent Truglia, head of the influential ratings agency's sovereign risk group, left the door open to future action, warning Japan's fiscal stance — already the most rapidly deteriorating among the Group of Seven industrialized nations — could reach levels never before seen.

With the economy headed for another year of contraction, the government is padding its revenue through bond issues threatening to push the ratio of debt to gross domestic product as high as 140 percent by 2003, Truglia said.

"This would be far in excess of anything ever seen in an industrialized country," he said.

Private economists expect Tokyo to wait to see January-March economic data and some of the April-June figures before compiling a stimulative supplementary budget, which would need to be paid for by digging itself deeper into debt.

Truglia's comments came amid more evidence Japan's economy was rolling backward despite a string of massive public works programs and a huge injection of public money into the sickly banking system.

The Ministry of International Trade and Industry said on Thursday that industrial production for 1998 fell 6.9 percent, the first fall in five years and the biggest since the 1970s oil shocks.

Moreover, while MITI forecast that manufacturing output would rise in January, the ministry said it would likely slip back 0.9 percent in February.

Bond traders, who had been rumoring for days that Truglia's Japan visit suggested an imminent downgrade, relaxed after his denial of an imminent ratings change.

However, reported hedge selling connected to Wednesday's issuance of government-guaranteed and municipal bonds stepped in to prompt selling. By the close, the yield on the benchmark No. 203 government bond had risen 45 basis points to 1.86 percent.

Truglia's comments also helped spur yen-buying.

On November 17, Moody's cut Japan's credit rating to Aa1 from the top-notch Aaa, a move it had hinted at eight months earlier.

Moody's cited Japan's inability to extricate itself from nine years of slow or negative economic growth and the government's steadily worsening fiscal stance in making the move.

Economists said the prospects of another downgrade remained high because government policy was rapidly being narrowed to monetization, the printing of money to pay for debt.

Without monetizing the debt, interest rates would rise to a punishingly high level. Other options, like raising taxes to pay for spending, would choke off consumption. Cutting government spending itself would weigh heavily on the economy.

"In this environment (monetisation), you would run the risk of a downgrading because it implies fiscal imprudence," said Cameron Umetsu, senior currency and interest rate strategist at Warburg Dillon Read.

Truglia said Japan's outlook remains negative, but said any decision on subsequent action would come within 12 to 24 months.

He cautioned that Japan's efforts to spend its way back to economic recovery would produce only fleeting results.

"As soon as the stimulus is withdrawn, (growth) disappears," he said.

He also estimated that cleaning up problem loans at Japan's banks may ultimately cost the government between 15 percent and 20 percent of GDP. The U.S. savings-and-loans crisis, by comparison, cost the American government about 2 percent of GDP, he said.

((Tokyo Equities Desk +81-3 3432 8806 tokyo.equities.newsroom+reuters.com))