A rise in Japan's sales tax to 8 percent from 5 percent next April will go ahead as planned, Japan's Prime Minister Shinzo Abe said on Tuesday.
The move, viewed as a a critical step in curbing the country's soaring debt levels, is expected to be accompanied by an economic stimulus package and possible corporate tax cuts to ensure the economy does not fall into a recession.
Abe is scheduled to hold a press conference at 0900 GMT on Tuesday.
"The government is trying to send a signal that it's serious about fiscal consolidation and getting its debt on a more sustainable path," said Benjamin Mandel, economist at Citi. Japan's gross public debt is estimated to reach 245 percent of gross domestic product this year - the highest in the world.
Investors cheered the decision, with Japanese stocks extending gains and dollar-yen climbing higher. Markets were already bolstered by a stronger than expected Tankan survey released earlier in the day, which showed business sentiment rising to the highest level in six years.
(Read more: Feeling good: Japan business sentiment soars )
"It's the right the thing to do," Jesper Koll, managing director & head of Japanese equity research at JPMorgan Securities in Tokyo, told CNBC after the announcement. "What we need in Japan's leadership is consistency, clarity and determination to do what is necessary. Prime Minister Abe deserves to be applauded here."
"We are moving towards a better tax system. They are buying insurance, there is going to be supplementary spending to ensure the economy is not going to fall into recession, it's a very good development in Japan," Koll added.
There has been some speculation that the Bank of Japan (BOJ) could step up its aggressive monetary easing program to help buffer the economy.
"We feel that the BOJ will continue to ramp up the level of easing in the coming months to help offset any concerns around the sales tax and this should continue to provide downside risks to the yen," said Stan Shamu, market strategist at IG.
The central bank will hold a two-day meeting starting Thursday this week, however no immediate reaction to the fiscal tightening is expected.
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