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By Takaya Yamaguchi

Japan's junior coalition signals tax hike to fund defence spending

Japan should not rely solely on debt issuance and must instead come up with a stable source of revenue to fund an expected rise in defence spending, a senior official of the ruling coalition said on Friday, flagging the chance of a future tax hike.

In the face of Russia's invasion of Ukraine and an increasingly tense situation in Asia with missile tests from North Korea and a more assertive China, Prime Minister Fumio Kishida has pledged to "drastically" increase Japan's defence spending within the next five years.

Kishida's administration and his Liberal Democratic Party (LDP) have been mum on how to fund the increase in spending, which would strain Japan's already tattered finances.

"It will take some more time to figure out the estimated size of the spending increase. But we shouldn't resort to debt issuance alone in funding the cost," Makoto Nishida, a senior official of the LDP's coalition partner Komeito, told Reuters.

"We need to discuss how to come up with a stable source of revenue," Nishida said in an interview, suggesting that raising tax or cutting other spending could be among options.

Komeito's views will be reflected in the ruling coalition's proposals on next fiscal year's tax reforms, which have huge influence on the government's economic policies.

Japan's public debt, at twice the size of its economy, is the largest among advanced economies and continues to grow mainly due to increasing social welfare costs for country's rapidly ageing population.

(Reporting by Takaya Yamaguchi, Writing by Leika Kihara; Editing by Shri Navaratnam)

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