Japan's centre-left premier is taking steps toward a consumption tax hike, a report said Monday, days after the central bank chief warned of the government's "very serious" fiscal state.
Prime Minister Naoto Kan plans to set up a body that would propose by mid-June a doubling of the tax to 10 percent by 2015, in a bid to cut Japan's sovereign debt, the Yomiuri Shimbun daily said.
The Yomiuri said Kan would head the so-called Core Member Council which would include 16 senior officials of his Democratic Party of Japan.
Japan's public debt stands at more than twice the size of its $5 trillion economy, the highest in the industrialised world, which has led major ratings agencies to lower their sovereign debt outlooks.
The fiscal woes are largely blamed on Japan's fast ageing and shrinking population, a trend that reduces the labour pool and raises state welfare obligations, as well as lower tax revenues amid sluggish economic growth.
Japan's public debt is set to grow further this year as the government plans to borrow more to pay for reconstruction after the March 11 earthquake and tsunami disaster that devastated much of the country's northern Pacific coast.
Bank of Japan Governor Masaaki Shirakawa in a Tokyo speech on Saturday said "the current fiscal state of Japan is very serious".
As shown by the recent European debt crises, he said, "if confidence in fiscal sustainability weakens, there would be a negative mutual interaction among three areas — fiscal conditions, the financial system and the real economy — that would have harmful effects on economic activities".
His comments came after Fitch on Friday cut its outlook for Japan's sovereign debt to negative from stable, also citing the economic risks associated with the country's Fukushima nuclear power plant crisis.
The ratings agency also stressed that Japan holds the world's second-biggest foreign currency reserves of more than $1 trillion, and that most debt is held domestically, "which reduces the risk of self-fulfilling panic among debt holders".
The move by Fitch followed similar actions by Standard & Poor's and Moody's, suggesting the financial community is growing more sceptical about Tokyo's ability to handle its ballooning public debt.
— Dow Jones Newswires contributed to this report —
