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Japan's lower house approves doubling of sales tax

Japan's lower house voted Tuesday to double the country's sales tax to 10 percent over three years in a bid to rein in a bulging national debt as an aging population burdens the country's social security system.

The vote, however, shook Prime Minister Yoshihiko Noda's grip on power because of strong opposition from a group within the ruling party led by power broker Ichiro Ozawa that believes the tax hike will weaken the economy. Ozawa and his supporters have threatened to bolt the Democratic Party over the tax issue.

The bill passed easily by a vote of 363-96, with support coming from the two biggest opposition parties. The bill must still pass the less powerful upper house to become law, which is expected.

It calls for raising the sales tax from 5 percent to 8 percent in 2014, and then to 10 percent in 2015.

Noda, who has been in power only since last September, has said the tax hike is needed to reduce Japan's bulging national debt, which is more than twice its gross domestic product. He has made the tax increase the centerpiece of his efforts to tackle Japan's structural woes.

"We made a first significant step toward the future," Noda told reporters after the vote. "It is painful to have to ask the people to share the burden. ... I wish I could avoid this measure. But somebody has to support the social security system, which benefits everyone."

Finance Minister Jun Azumi said he hoped the vote would send a message to the world that Japan is dealing with its economic problems. "I think this shows the international community that although we had been criticized as indecisive, we are taking action," he said.

Japan was hit hard by last year's devastating earthquake and tsunami, but has been sputtering for years with a stagnant economy and one of the largest public debt burdens in the developed world. The country's aging population has strained its social security and tax systems, with Japanese aged 65 and older now making up about a quarter of the population — a figure projected to rise to 40 percent by 2050.

Even Noda's government projects the tax hike will take only a modest bite out of Japan's deficit. The Cabinet Office forecasts that doubling the sales tax will boost revenues by 13.5 trillion yen ($170 billion) annually by 2015. Japan currently runs a deficit of about 45 trillion yen ($563 billion) a year.

Some economists warn that the tax increase will weaken consumer demand at a time when wages are stagnant and people are already holding back on spending. Key auto and electronics exporters, meanwhile, have been battered by a strong yen, natural disasters that have disrupted supply chains, and intensifying competition from Asian rivals.

While last year's tsunami disaster made many Japanese more willing to make sacrifices to help their country recover, they are concerned about how the higher taxes will affect their personal finances.

"The tax hike will bring about another headwind to the economy, which is weaker consumption," said Hiromichi Shirakawa, Credit Suisse's chief Japan economist. He said the tax increase will drag down economic growth and erode income taxes and corporate taxes, thus worsening Japan's debt burden over time. He said the government instead should first focus on ways to cut public spending and bolster the economy, and then raise the sales tax.

"In 10 years' time, we may see a more disastrous fiscal situation," he warned.

Noda disputed criticism that a higher sales tax would harm the economy, saying that if the government waited any longer it would be too late.

The rebellion within the Democratic Party raises the possibility of a party split, which would make it difficult for Noda to achieve his goals — and perhaps even force him to call a general election.

Ruling party veteran Ozawa, who has often criticized Noda and controls a bloc in the ruling party, has suggested he may leave the party and take as many lawmakers as he can with him to form a new one. If 54 or more lawmakers join Ozawa, Noda's party would lose its majority in the key lower house.

Fifty-seven ruling party members voted against the tax hike, according to a tally by public broadcaster NHK.

Ozawa indicated after the vote that he wouldn't leave the party immediately, but would make a decision on what to do soon.

Noda said it was "extremely disappointing" that so many ruling party members voted against the bill, and suggested that party leaders would consider penalizing them.

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Associated Press writers Eric Talmadge and Mari Yamaguchi contributed to this report.