Japan eyes tobacco tax hike for reconstruction

Japan is considering a hike in its tobacco tax to help fund reconstruction costs, the Yomiuri newspaper said on Thursday, which could be first in a variety of tax increases as the country rebuilds from natural disaster and tries to repair weak public finances.

The hike, which the government hopes to implement as early as the next fiscal year starting April 2012, could bring in as much as 200 billion yen ($2.5 billion) annually, the newspaper said without citing sources.

The Democratic Party-led government agreed last month to double the 5 percent sales tax by mid-decade to pay for social security costs, which are rising by about one trillion yen a year due to an aging society.

Japan's outstanding debts are about twice the size of its $5 trillion economy, and credit ratings agencies say tax hikes are needed to avoid a sovereign downgrade.

An advisory panel called last month for a temporary hike to either the sales tax, the corporate tax or income taxes to rebuild the northeast coast, which was devastated by a large earthquake and tsunami on March 11.

But embattled Prime Minister Naoto Kan faces a divided parliament where opposition parties can block legislation and it is not clear whether such hikes can be implemented.

The government is leaning toward increasing taxes on cigarettes as that's likely to draw less objection from the public, the Yomiuri said.

A tobacco tax hike would however be a blow to Japan Tobacco (2914.T) which controls close to two-thirds of the domestic cigarette market. ($1 = 80.930 Japanese Yen)