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TOKYO (Reuters) - Prime Minister Shinzo Abe is on course to raise Japan's sales tax as scheduled in a crucial step toward fixing the nation's tattered finances, despite calls in his government to water down the increase, senior coalition officials said on Wednesday.
Abe has said he faces a "difficult decision" choosing between his top priority of fostering growth in the world's third-biggest economy and starting to rein in the industrial world's heaviest public-debt burden.
He has instructed his government to consider alternatives to the two-stage doubling of the sales tax - similar to a goods and service tax in other countries - such as implementing it more gradually than planned.
But the top tax officials in Abe's ruling coalition parties told Reuters the premier is on course to raise the sales tax to 8 percent in April from 5 percent now and then to 10 percent in October 2015 - Tokyo's most significant fiscal reform in decades.
"I'm confident Prime Minister Abe is not wavering," on the tax-hike plan, Tetsuo Saito, head of the tax commission of New Komeito, the junior coalition partner, said in an interview.
His counterpart in Abe's Liberal Democratic Party, Takeshi Noda, said in a separate interview that he recently met with Abe and "of course" the premier will proceed with the plan to double the 5 percent levy over two years.
Abe ordered the consideration of alternatives to the planned tax hikes out of concern they could derail the nascent recovery spurred by Abe's aggressive monetary easing and hefty government spending, government sources have told Reuters.
This open debate has raised the possibility that Abe might postpone the tightening or slow the tempo from the current plan.
But Noda and Saito said that changing course now could wreck confidence in Japan, whose public debt tops 240 percent of GDP, the biggest in the industrial world. This, they said, could push up long-term interest rates, perhaps calamitously.
"Confidence in Japan would fall, and government bond yields would be affected" if Tokyo gives the impression that it is faltering on the tax issue, said Noda, a former finance ministry bureaucrat and a fiscal hawk.
"That could be fatal," he said. "The biggest risk to 'Abenomics' is a spike in interest rates."
Abe returned to power in December pledging to revive the world's third-largest economy with his policy mix of aggressive fiscal and monetary stimulus and promises of longer-term pro-growth reforms.
And despite its debt position, Japan has retained the confidence of investors. The government can borrow 10-year money for barely 0.8 percent.
But Saito said the government-bond market will not show forbearance for much longer unless Tokyo embarks on fiscal reform as planned. "I think we have come to the limit," he said.
Under an agreement last year between the LDP, its coalition partner and the previous ruling party, Japan enacted the tax-hike schedule. But the law requires the government to confirm that the economy - sluggish for years - is strong enough to withstand the tax increase.
Government officials say Abe will look at economic data, especially revised GDP figures for the second quarter due on Sept 9, and decide on the tax by early October.
A small number of vocal reflationists, such as Cabinet Office adviser Koichi Hamada, say Abe should prioritise recovery and go slowly on raising the tax.
Pitted against them, the Finance Ministry says it is vital for Japan to show markets and trading partners that it is serious about fixing its public finances.
Noda dismissed the alternatives from Hamada, an emeritus professor at Yale University, and another academic adviser to the premier. "You can't do tax policy with armchair theories," he said. Debate is fine but the conclusion will be the same, he insisted.
The two coalition tax officials suggested there is an element of political theatre in Abe letting the alternative tax ideas bloom. Noda said the premier wants to show his leadership over the Finance Ministry bureaucracy. Saito said Abe wants to prod the civil service to come up with targeted tax cuts and other growth policies that will ease the pain of the sales-tax hike.
"Prime Minister Abe has exercised leadership in monetary easing and flexible fiscal spending, and economic figures have risen," Saito said. "I expect him to proceed along the established lines with confidence."
Still, tensions within the government are breaking into the open as the tax debate plays out on the front pages of Japan's newspapers.
After Economics Minister Akira Amari said on Tuesday that the government can not abandon the sales-tax plan unless there is an economic shock on the magnitude of the 2008 Lehman failure, government officials hurriedly "clarified" his remarks. The minister only meant that it would be hard to consider leaving the sales tax rate at 5 percent "in the medium term," they said.
In its mid-term fiscal plan due next month, the government is expected to aim for narrowing its budget gap by 8 trillion yen ($81.59 billion) in order to keep a promise to halve the budget deficit - excluding new bond sales and debt-servicing - by the fiscal year to March 2016, government sources told Reuters on Wednesday.
Abe is expected to present the fiscal plan, which seeks a primary budget balance by March 2021, to his counterparts from the Group of 20 big industrial and developing countries at a Sept 5-6 summit in St. Petersburg.
Additional reporting by Yuko Yoshikawa and Takaya Yamaguchi: Writing by William Mallard; Editing by Edmund Klamann and Neil Fullick