Kan, who has made fiscal reform a top priority since taking office, also said he would map out the size of a future sales tax hike by the end of the fiscal year to March 31, 2011.
The premier declined comment on when a tax rise might be implemented, but Democratic Party policy chief Koichiro Genba said the earliest timing technically would be autumn 2012, adding corporate tax cuts to boost competitiveness could come first.
The Democrats ousted their long-dominant conservative rivals in a historic general election last year, promising to cut waste and focus spending on households to spur growth.
But Europe’s debt woes have fanned concern about a Japanese public debt already twice the size of the economy, and voters, worried about creaking pension and health care systems, have become less resistant to a sales tax rise.
“To be honest, we as politicians wish we could avoid asking the people to shoulder more of a tax burden,” Kan told a news conference.
“Jitters in Europe stemming from the financial collapse of Greece are no longer somebody else’s problem.”
He added that an opposition proposal to raise the tax to 10 percent was “one major reference point”.
In a manifesto for the upper house election, the Democrats called for multi-party debate on drastic tax reform including the five percent sales tax, opening the door to a future tax hike the Democrats are betting worried voters will accept, if not welcome.
“Public opinion is in favour of changing the manifesto to make it more practical,” DPJ senior lawmaker Hajime Ishii told reporters. “I think what the people want is to achieve healthy finances in the next five to 10 years.”
Voter support for the Democrats has rebounded since Kan took over from his unpopular predecessor, Yukio Hatoyama, improving the party’s chances in the upper house election.
The Democrats will stay in power regardless of the outcome in July given their huge majority in the lower house, but need to control the upper house to pass legislation easily.
The opposition Liberal Democrats have said Japan’s sales tax – low by global standards – should be raised to around 10 percent. Some economists say it should be as high as 20 percent.
A one percentage point increase in the sales tax would boost revenues by about 2.5 trillion yen, according to Seiji Shiraishi, chief economist for Japan at HSBC Securities.
The DPJ’s Ishii said the government would not raise the sales tax before the next election for parliament’s lower house, which must be held by late 2013 but could come sooner.
“Tax hikes often don’t proceed as planned. Expectations towards fiscal restructuring are there because a new prime minister came into office, but such expectations may be dented once tax hike plans run into difficulties.” said Koichi Ono, senior strategist at Daiwa Securities Capital Markets.
The Democrats vowed to seek an early end to deflation through cooperation between the government and the Bank of Japan.
They also pledged to do their best to keep fresh government bond issuance in the fiscal year starting next April from exceeding the “level for fiscal 2010”.
But they did not specify the level of a Japanese government bonds (JGBs) cap, which might worry bond market investors.
“Our basic stance is to compile (next fiscal year’s) budget while keeping new JGB issuance from topping the amount planned in the initial budget (for this fiscal year),” said Goshi Hosono, acting secretary general of the party.
But he added that the economy was a “living thing” and the government might need to act flexibly.
The government planned to issue new JGBs worth 44.3 trillion yen ($485bn) in its initial budget for the current fiscal year, but that could change.
The rebound in voter support for the DPJ since pragmatist Kan took over means the party now has a shot at winning an outright majority in the upper house, the DPJ’s Ishii said.
“If a vote were held now, we’d get around 50 seats or so, but over the next month, if we appeal as the ruling party with proper policies and fight in the districts, attaining an outright majority is not impossible,” he said.
The party needs to win 60 of the 121 seats up for grabs in the 242-member chamber to take a majority without relying on current or new coalition partners to pass bills smoothly.