The government will promote national debate on proposed drastic changes to the tax system, including a consumption tax increase, as part of expenditure-revenue reforms, Finance Minister Sadakazu Tanigaki told the Diet on Friday.
In a policy speech delivered on the opening day of the ordinary Diet session, Tanigaki indicated the government will consider raising the consumption tax from the current 5 percent.
A 1 percentage point increase corresponds to a tax revenue hike of about 2.5 trillion yen a year.
The minister also said it is necessary to craft measures that would push forward fiscal reforms, both on the expenditures and revenue sides, to reduce the size of the "excessive" national debt.
"When the market starts doubting the sustainability of (Japan's) finances, it may create risk premiums and lead to rises in interest rates, which would have a negative effect on the economy overall," he said.
Tanigaki said the government must demonstrate "a firm attitude" toward fiscal structural reforms to prevent market worries.
The public must also look at ways to make the social security system sustainable and the government must review premiums and benefits of pensions and medical insurance, he said. The rapidly aging population has been driving up social security costs -- the largest slice of policy-related spending -- by 1 trillion yen a year.
The minister has said he sees it as "extremely difficult" to put the nation's financial affairs in order by cutting spending alone, alluding to his desire to raise the consumption tax as early as fiscal 2007.
The government plans to present budget and tax reform outlines in June, and finalize them by the end of March 2007.
He said the government must also consider cutting the proportion of debt to gross domestic product, which stood at 152.8 percent as of March 31, the highest among major industrialized nations.