UPDATE 3-Japan cabinet edges further away from tax decision

(For more stories on the Japanese economy click [ID:nECONJP])

* Strategy minister says more debate needed on sales tax

* Finance minister says decision rests with prime minister

* DPJ panel aims to keep new JGB issuance below Y44.3 trln

* Govt fears sales tax hike could alienate voters

* Investors critical of fiscal deficits after Greece bailout
(Adds lawmaker’s comments, details)

By Stanley White and Tetsushi Kajimoto

TOKYO, May 14 (BestGrowthStock) – Cabinet ministers skirted around
the issue of whether to commit to raising Japan’s 5 percent sales
tax on Friday as the government struggles to strike a balance
between fiscal deficit worries and raising the burden on voters.

Investors are on edge over countries with large debt burdens
after a crisis of confidence in Greece’s fiscal policy roiled
financial markets and prompted the European Union to roll out a
$1 trillion rescue package to defend the falling euro.

Prime Minister Yukio Hatoyama distanced himself on Thursday
from calls within his Democratic Party of Japan (DPJ) to include
a hike in the politically sensitive consumption tax in campaign
pledges for an upper house election expected in July.

Japan’s outstanding debt as a ratio of gross domestic product
is the worst among industrial nations. Mixed signals on tax hikes
risk eroding the government’s credibility a month before it is
set to release a plan to restore fiscal health.

“A tax hike plan could stall even after the (upper house)
election if the Democrats failed to win and need more help from
coalition partners to avoid policy deadlock,” said Hidenori
Suezawa, chief strategist at Nikko Cordial Securities.

“The situation could get even more chaotic.”
Graphic on Japan fiscal woes http://link.reuters.com/qeg59h
More stories on Japan’s economy [ID:nECONJP]

National Strategy Minister Yoshito Sengoko said nothing has
been agreed on the tax hike plan, while Finance Minister Naoto
Kan said the final decision rested with the prime minister.

Illustrating disarray within the DPJ-led government, a senior
party official softened his earlier remark that the party would
vow to raise the tax after the next election for parliament’s
more powerful lower house, which must be held by 2013.

“We agreed today to overhaul Japan’s tax system including the
consumption tax after the next general election,” vice
secretary-general Goshi Hosono told reporters after a panel
meeting to draft the campaign platform for upper house elections.


The panel also agreed that the party will aim to keep new
Japanese government bond (JGB) issuance next fiscal year below
this year’s level by reviewing spending promised during last
summer’s general election in which the Democrats swept to power.

The final decision will be made by a senior committee
including the prime minister, likely by the end of this month.

Kan, who has called for a cap on new debt issuance for next
fiscal year, reiterated concerns about ballooning public debt.

“Sales tax rates in Japan differ widely from those in Europe,
and we must take a broad view when analysing the fiscal
situation,” he told reporters, referring to the much lower tax
rates in Japan.

Outstanding debt would grow even if new bond issuance was
kept at the current level of 44.3 trillion yen ($478 billion), a
record for an initial budget, Kan told reporters.

Investors doubt if keeping the cap would be feasible given a
government estimate that new JGB issuance could top 57 trillion
yen in the fiscal year from April 2011 on the assumption that the
Democratics carry out all of their spending promises.

The Ministry of Finance also estimates that new debt issuance
could exceed 51 trillion yen in fiscal 2011/12 if current
spending programmes continue.

Hatoyama’s government, whose support has nosedived to around
20 percent, is worried that raising the tax would upset voters
who want it to first cut wasteful spending. [ID:nTOE64C04L]

Hatoyama has said in the past that an increase in the tax
could wait a few more years, and late on Thursday he said the
government had not yet wrapped up talks on whether to promise a
future increase in the tax in its campaign platform ahead of the
upper house vote.

“Policymakers may agree on a tax hike in principle but market
players are not expecting much from this, because no one believes
they could come up with a plan to raise the tax by when and how
much anyway, particularly ahead of the upper house election,”
Nikko Cordial’s Suezawa said.

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($1=92.75 Yen)
(Editing by Charlotte Cooper and Michael Watson)

UPDATE 3-Japan cabinet edges further away from tax decision