Japanese Finance Minister Naoto Kan said he was open to debating sales tax reform, suggesting the government may consider raising the tax to help fund its spending programs focused on supporting households.
Many analysts say the government will have no choice but to raise the consumption tax, now at 5 percent, to make up for falling overall tax revenues and a likely rise in welfare spending due to the country's aging population.
Prime Minister Yukio Hatoyama, who took office in September after a landslide election victory, reiterated on Monday his pledge not to raise the politically sensitive tax until the next general election, which must be held by late 2013.
I have no recollection of deciding that we wouldn't debate the sales tax under the Hatoyama cabinet, Kan, who is also deputy prime minister, told lawmakers in parliament on Monday.
It would be unnatural to debate tax reform while excluding the consumption tax.
But Kan added that the government would ask voters for their opinion before embarking on such a big tax reform, suggesting a sales tax hike would not precede the next general election.
I said during the general election (last year) that we would not raise the sales tax while in power for the next four years, and that is my wish, Hatoyama told reporters later on Monday.
Finance Minister Kan understands the need to fulfill this.
The government is expected to fund less than half of its budget for the fiscal year starting in April with tax revenue, which is set to fall behind new debt borrowing for the first time since World War Two.
Kan said the previous day that the government would start discussing tax reform in March, in the clearest sign yet that it will consider a sales tax hike to deal with a yawning fiscal gap.
The new Democratic Party-led government faces a dilemma as it tries to keep the frail economy afloat without adding to Japan's public debt, which is already around twice the size of the country's gross domestic product.
Concern that Japan has no plausible plan to get its finances back in order have rattled markets, pushing the cost of buying protection against sovereign debt default to a 10-month high in credit derivative markets earlier this month.
Standard and Poor's said last month it would cut Japan's rating unless it produced a credible plan to rein in debt and lift growth in an economy plagued by deflation.
The government has said it will come up with a long-term fiscal plan by June. But analysts doubt it will call for drastic fiscal tightening ahead of an upper house election this summer.
Parliament is debating the government's record 92.3 trillion yen ($1.025 trillion) draft budget for the fiscal year from April. The budget includes more new debt issuance than expected tax revenue.
The International Monetary Fund says Japan's public debt could reach 227 percent of GDP in 2010 -- greater than the combined annual economic output of Germany, France, Britain and Canada.
With tax revenues unlikely to rise much due to a weak economy, the government is struggling to find sources of funding to make ends meet.
It will consider whether there is room to tap Japan's special account for foreign reserves, which holds around 20 trillion yen, for the fiscal 2011/12 budget, Kan told parliament.