June 30, 2011 / 10:31 AM / in 7 years

UPDATE 1-Japan govt agrees tax hike, hurdles to plan remain

* Japan moves toward sales tax hike for welfare spending

* Delay in plan risks sovereign ratings downgrade

* Support from combative opposition uncertain (Adds details)

By Stanley White

TOKYO, June 30 (Reuters) - Japan’s government agreed on Thursday to double the sales tax to 10 percent by mid-decade to fund rising welfare costs but faces difficulty in getting the necessary support from combative opposition parties.

The ruling Democratic Party is set to reach out to the main opposition Liberal Democratic Party (LDP) and other parties, but intense criticism of Prime Minister Naoto Kan’s handling of the March earthquake, tsunami and nuclear meltdown means prospects for cooperation are dim.

Japan’s outstanding debts are already twice the size of its economy, and ratings agencies have long argued that higher taxes are needed to repair public finances. Japan may also struggle to pay for reconstruction and faces the threat of a sovereign downgrade.

“With this plan, we will ask ruling and opposition parties to participate in discussions for wide-ranging social security reform,” Kan said at a meeting on the proposal.

Improvement in the economy is a pre-condition for tax hikes, National Strategy Minister Koichiro Gemba told reporters.

This is less ambitious than the government’s initial proposal of doubling the sales tax by 2015 to pay for changes to social security spending as Japan ages. Ruling party lawmakers bristled at the idea of having a more concrete timetable for tax.

Moody’s Investors Service has already warned that missing a deadline last week for the plan was a bad omen for Japan’s debt rating, yet another headache for Kan, Japan’s fifth premier in as many years.

Kan faces rebels in his party and a hostile opposition that is using its control of parliament’s upper house to block legislation, hoping to force him to resign. Kan has said he will resign but has not said when.

“We have no set demands to participate in talks with the government on social security and tax reform,” Sadakazu Tanigaki, head of the LDP, told reporters on Thursday before the government’s decision.

“However, the ruling party and the cabinet have a decision-making process that is unclear. This is at the root of the government’s various problems.”

Japan’s sales tax is among the lowest in developed countries, but many politicians consider tax increases to be taboo.

The last time the sales tax was raised to 5 percent from 3 percent, in 1997, it coincided with the Asian financial crisis and is often blamed for pushing the economy into recession and leading to election losses for the government. (Additional reporting by Yuko Yoshikawa, Yoko Kubota and Tetsushi Kajimoto; Editing by Edwina Gibbs)

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