By Yoshifumi Takemoto and Yuko Yoshikawa
TOKYO (Reuters) - Japan is considering $50 billion in economic stimulus to cushion the blow of a national sales-tax increase that is meant to rein in the government's massive debt, people involved in the decisions said on Thursday.
Prime Minister Shinzo Abe is set to raise the tax to 8 percent from 5 percent in April, rejecting calls by some advisers to delay or water down the fiscal tightening in order to keep the economic recovery on track.
The tax hike is the biggest effort in years by the world's third-largest economy to contain a public debt that, at more than twice the nation's annual economic output, is the biggest in the world.
But Abe has said he must balance the long-term need to balance the budget against his top priority of breaking Japan free from 15 years of deflation and tepid growth.
To offset the drag from the tax increase, Abe this week instructed his government to craft a stimulus package by the end of the month.
One option is a spending package worth 5 trillion yen ($50.01 billion), one of the sources said.
The government estimates that each 1 percentage point rise in the tax will generate roughly 2.7 trillion yen in revenues.
Chief Cabinet Secretary Yoshihide Suga said Abe has not yet decided on the tax increase, a move expected on October 1 after a key survey of business sentiment from the Bank of Japan.
Suga, the top government spokesman, said Finance Minister Taro Aso and Economics Minister Akira Amari will work out the size and contents of any package.
Aso's ministry, concerned about getting Japan's finances in order, is a strong proponent of the tax increase and wants to minimize any further spending. Amari has said the economic package must be bigger than 2 trillion yen to avoid an economic relapse.
Options include payments to lower-income people to promote housing purchases, tax breaks for companies that increase capital spending and possibly a one-off income-tax cut, sources said.
The prime minister has been proceeding cautiously since many politicians blame the last sales-tax hike, in 1997, for plunging the country into recession. The economy has improved smartly since Abe came to office in December on a platform of fiscal stimulus, monetary easing and growth-promotion measures, but the rebound remains fragile.
With a big upward revision to second-quarter GDP this week and the feel-good boost of Tokyo winning the right to host the 2020 summer Olympics, "the justification for delaying or changing the tax hike disappeared," one source said.
Political leaders from a spectrum of parties agreed last year to double the sales tax to 10 percent in two stages by October 2015. But the law requires the government to certify that the economy is strong enough to weather the drag from the tax hike.
(Additional reporting by Shinji Kitamura, Leika Kihara and Elaine Lies; Writing by William Mallard; Editing by Kim Coghill)