Japan may go to polls early as Abe mulls tax hike

TOKYO (Reuters) - Officials from Japan's ruling coalition urged lawmakers on Tuesday to prepare for a possible early election, and a government source said Prime Minister Shinzo Abe was likely to delay a tax hike that could derail a promised economic recovery.

A second government source said one option being considered was for Abe to call a snap poll before the end of the year if he decides to delay a planned but unpopular sales tax increase to 10 percent from next October.

Abe said he had not decided on the timing of an election. "As for the timing of dissolving parliament, I haven't made any decision," he told a news conference in Beijing, where he was attending an Asia-Pacific leaders' summit. He added that he had never mentioned the possibility of a snap poll.

No election for parliament's lower house need be held until 2016, but political insiders said Abe might well decide to try to lock in his mandate before his voter support fades.

Experts said Abe's Liberal Democratic Party (LDP) might lose some seats, but the ruling bloc was in no danger of losing its majority to a fragmented opposition.

"It is for certain that the winds have begun to blow for the dissolution of the lower house," Toshihiro Nikai, a top LDP official, told reporters, adding that the party must be ready to fight and win an election.

The Yomiuri newspaper reported on Tuesday that Abe might dissolve the lower house as early as next week and call an election for next month, possibly on Dec. 14.

Opposition parties were also preparing for a battle at the ballot box. One senior opposition party source put the probability of an early vote at 90 percent.

"If Abe doesn't call an election now, he will lose credibility," the opposition source said.

Abe surged to power in December 2012, promising to revive the economy with his triple "Abenomics" recipe of hyper-easy monetary policy, fiscal spending and structural reform.

But a sales tax hike to 8 percent from April, part of a two-stage plan to rein in huge public debt, sent the economy into a slump and recovery has been less robust than officials hoped.

RECOVERY FRAGILE

A government source close to Abe told Reuters that the premier was likely to delay the tax rise, judging that the recovery was too fragile to weather a further blow. "There's a high probability that the consumption-tax hike will be delayed," the person told Reuters. "It looks like the government will begin full-fledged consideration of this."

Sentiment among Japanese households and service sector companies tumbled in October, data released on Tuesday showed.

The figures were a stark reminder of how far the economy has veered off course compared to the beginning of the year, when the government said its fiscal stimulus would easily offset the impact of higher taxes.

Preliminary data for third quarter gross domestic product is due out on Nov. 17 and revised figures on Dec. 8.

Financial markets have been expecting Abe to go ahead with the planned tax hike, partly because a delay could be seen as an admission that his economic policies had failed to boost growth.

The Nikkei stock average closed up 2.05 percent after reports of a possible delay. "Both fiscal and monetary policies will be supporting growth in the near future," said Norihiro Fujito, senior equity strategist at Mitsubishi UFJ Morgan Stanley Securities.

Japanese government bond prices fell on worries that a postponement boded ill for curbing the country's bloated debt. "Fiscal reconstruction is a serious topic. If you ask people at an election, of course they'll be against a tax rise. People abroad will be worried at this kind of populism," said Makoto Kikuchi, CEO of Myojo Asset Management.

Abe's support ratings took a hit from a series of financial scandals in his cabinet as well as doubts about the economic recovery, and some political insiders said he might want to call the snap poll before they slide further.

"Everyone thought the election would be next autumn but before that, Abe must tackle several unpopular policies," an LDP lawmaker told Reuters, citing plans to restart nuclear reactors taken off line after the 2011 Fukushima disaster and measures to ease curbs on Japan's military.

"If he waits and dawdles, he might have to call the election when his support rates are even lower."

A survey by NHK public TV released on Monday showed support for Abe slid 8 percentage points to 44 percent, the lowest since he returned to power for a rare second term.