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TOKYO (Reuters) - Prime Minister Naoto Kan renewed his call on Monday for tax reform including a possible doubling of the sales tax to rein in Japan's huge debt, as ratings agency Fitch warned the country needed a credible fiscal reform plan.
Support for Kan's new government has fallen since he floated the idea of raising Japan's 5 percent sales tax, surveys released on Monday showed as his party heads into a July 11 upper house election it needs to win to avoid policy deadlock.
But while voters appear divided over the need for a sale tax hike, Kan's Democratic Party -- which swept to power last year promising change -- kept its lead over its main opposition rival.
"It's not necessary to mention the example of Greece but when fiscal collapse occurs, the livelihoods of many people go bust and the social security system collapses," Kan told a news conference. "In that sense, it goes without saying that strong state finances is essential for both growth and social security."
Kan, who has made fiscal reform a priority since taking power this month, last week said doubling the sales tax was an option to stave off a Greek-style crisis.
In a sign of persistent worries about Japan's debt, now near 200 percent of GDP, Fitch Ratings told Reuters Japan's sovereign ratings could come under downward pressure if Tokyo has no credible fiscal reform plan by the year-end.
The new government will unveil a strategy on Tuesday to fix tattered finances to reassure investors it will cut mushrooming debts. Kan has said he would come up with a tax reform plan by the end of the fiscal year to March 31, 2011.
A poll by the Asahi newspaper showed support for Kan's government dropped to 50 percent from 59 percent in a survey a week ago. The newspaper cited increased opposition to the government among those who object to a sales tax hike.
But 48 percent of voters supported Kan's remarks on possibly doubling the sales tax in the future, against 44 percent who did not, a separate survey by the Yomiuri newspaper showed.
Surveys by public broadcaster NHK and Kyodo news agency showed similar trends, although support for Kan's government fell 12 points from last week's survey to 49 percent in the NHK poll.
Kan said the government would start a full-fledged debate on the sales tax after the upper house poll, but added it would take at least two to three years to implement the increase.
Jun Azumi, chairman of the Democratic Party's campaign committee, said he was relieved and concerned by the surveys.
"If we do not properly convey our way of thinking, the campaign will not necessarily succeed. So we want to stay on our toes," Azumi told Reuters.
The party's top goal in next month's election was to win enough seats to keep Kan, Japan's fifth premier in three years, from becoming the latest of the revolving-door leaders, he said.
Analysts have said the Democrats could woo New Komeito, Japan's third-biggest party, as a possible coalition partner to implement policies even if they fall short of a majority. But New Komeito leader Natsuo Yamaguchi ruled that out.
"We have no intention of cooperating with the DPJ just to make up numbers (for a majority) at their convenience," he said.
Kan, who has advocated a "Third Way" economic strategy that would use increased tax revenue to spur new demand, stressed he was not focusing on fiscal reform at the expense of growth.
"I do not think that it is good if we merely rebuild fiscal conditions. For instance, if we raise the sales tax and use that to repay debt, that is a deflation policy," Kan said.
"Instead, integrally implementing these three goals -- realizing growth, making social security stronger and rebuilding fiscal conditions -- would set the course to bring back a vigorous Japan."
An adviser to Kan, Osaka University Professor Yoshiyasu Ono, told Reuters Japan should raise the sales tax and other taxes "substantially" from next year to create jobs and beat deflation, rather than seek more monetary easing.
Debate on raising the sales tax, one of the lowest among major economies, has long been politically touchy. The last consumption tax increase, in 1997, was blamed by some for triggering a recession that led to a long period of deflation.
But many economists say an increase is unavoidable to deal with Japan's soaring public debt and fund the rising social security costs of a fast-aging population.
Kan said on Sunday he would discuss reducing the tax rate for food and other necessities when considering a sales tax rise.
The Democrats promised to cut waste and focus spending on consumers, but support for the party and the government plunged during Yukio Hatoyama's tumultuous eight months in office.
The Democrats will stay in power regardless of the outcome of the election, but need to win an outright majority in the upper chamber to secure passage of measures without coalition partners.
Additional reporting by Tetsushi Kajimoto, Linda Sieg, Rika Otsuka, Chisa Fujioka, Yoko Kubota and Kiyoshi Takenaka; Editing by Edwina Gibbs and Ron Popeski