By Rie Ishiguro
MANILA (Reuters) - Japan could face "the day of reckoning" sooner than expected if the government fails to raise the sales tax and investors demand higher returns on government bonds, Moody's Investors Service said on Wednesday, keeping up the pressure on Tokyo to enact tax reform bills.
Tom Byrne, senior vice president and regional officer, acknowledged the tax increase would leave Japan facing weaker economic growth but said the country needs to "bite the bullet" and start fixing public finances driven by swelling welfare costs.
"If you don't increase taxes you'd have to issue more JGBs which moves the day of reckoning closer to the tipping point where markets demand higher risk premiums," Byrne told reporters on the sidelines of the Asian Development Bank meeting in Manila.
"We tend to think there is a tipping point where things could change abruptly."
Facing snowballing debt, Prime Minister Yoshihiko Noda is struggling to preserve party unity and push through a contentious plan to double the 5 percent sales tax by 2015, with opposition parties that control the parliament's upper house refusing to cooperate.
Moody's rates Japan's sovereign credit at Aa3 with a stable outlook but has warned the rating would be reviewed if the tax hike plans are delayed further.
The government borrows more than it raises in taxes, and its debt pile amounts to two years' worth of Japan's economic output, the highest debt-to-GDP ratio in the world.
Unlike debt-stricken European nations, most of Japan's government bonds are owned by domestic investors, which has so far allowed the government to roll over the debt with ease despite concerns about its finances.
(Reporting by Rie Ishiguro; Editing by John O'Callaghan & Kim Coghill)