Japan's Finance Minister Taro Aso voiced concerns that the country can't withstand a possible corporate tax cut in a bid to balance the negative impact of the planned sales tax hike.
"Realistically speaking, it would be difficult to lower the corporate tax while raising the sales tax," he told reporters after a cabinet meeting.
Aso has been very cautious about the proposal, as Prime Minister Shinzo Abe called for a study to investigate how the lowering of the corporate tax rate will affect the market, in order to attract more foreign investment into the country.
The comments from Aso come as the government prepares to draw up an economic package by the end of September. Earlier, there were media reports that Japan is considering options including a 5tn yen ($50bn, €38bn, £32bn) spending package to cushion the sales tax hike.
Finance Minister Aso and Economics Minister Akira Amari are responsible to work out the size and contents of any package, according to government sources.
While, Aso's ministry wanted to minimise any further spending, Amari strongly advocated the stimulus package, adding that it should be bigger than 2tn yen to avoid the possible negative impact on the economy.
In his latest response, Aso made no comment of the size of the package, but noted that the government should not resort to additional borrowing if it were to announce an an extra budget for the current fiscal year. The country is already suffering from a huge public debt, which is the largest among industrialised nations at more than 1,000tn yen.
Case for Lower Corporate Tax
Japan has one of the highest corporation tax rates in the world at about 38%. Among member countries of the Organization of Economic Cooperation and Development (OECD), Japan's corporation tax rate is only exceeded by the US.
Abe is considering lowering the rate between 25% and 30%, according to the sources of The Nikkei economic daily.
Lowering corporate taxes could boost business investment in the world's third-largest economy but it could also hamper government plans to increase revenues.
However, if Japan does not slash corporate tax rates, it would be difficult for the country to go ahead with its planned sales tax hike, given the economic growth concerns.
Aimed at curbing public debt, which is almost double the size of GDP, Japan is planning to increase its sales tax rate from 5% to 8% next April and then to 10% in October 2015. Each 1 percentage point increase in tax rate would generate about 2.7tn yen in revenue for the economy, according to government estimates.
After an initial confusion due to calls by some advisers to delay or water down the fiscal tightening, Abe and key members of his cabinet including Aso have agreed the tax-hike plan in principle.
A formal announcement on the tax hike is expected on 1 October after a key survey of business sentiment from the Bank of Japan.