Tokyo: Japan will explain to its partners in the Group of Eight (G8) most industrialised nations, a tax reform programme to stimulate its economy this weekend, but economists are unsure it will be implemented because of divisions in the government and ruling coalition.

Prime Minister Junichiro Koizumi last week told the government to proceed with major tax reforms to boost consumption and investment, as part of a broader fight against the deflation plaguing the world's second largest economy.

The government's Tax Commission is to submit its plan of tax reforms for the next financial year starting in April 2003 to Koizumi on June 14, hours before the opening of the two-day meeting of G8 Finance Ministers in Halifax, Canada.

However, Economists said the three main sources for the reform proposals were at odds over which measures to take. The three groups putting together the reform programme are the ruling Liberal Democratic Party (LDP), Tax System Research Council, the government's Tax Commission, linked to the finance ministry, and the Council on Economic and Fiscal Policy (CEFP), which reports to Koizumi.

"The goals of the three groups are completely different. The CEFP focuses on using the tax system as a tool of economic revival, the Commission focuses on using the system as a revenue tool, and the LDP is using the tax system as a political tool, " explained Robert Feldman, Managing Director of Morgan Stanley in Tokyo.

Feldman said he only expected results in the few areas where the three camps did agree."Modest investment tax credits, some changes in inheritance tax and gift tax," he predicted, but said but no tax cuts would be introduced before the 2003 financial year.

Koizumi has stipulated that the reforms should be introduced from the next fiscal year, not earlier, and be completed by March 2007. But MPs from the LDP are calling for tax cuts to be introduced this year, according to party Secretary General, Taku Yamasaki.

The new tax, which is expected to hit small companies hard, would be politically difficult to implement, according to Murashima. "The package today looks more like deflationary measures."It is tax revenue neutral with mid to long-term tax hikes not cuts. Today's tax cut is tomorrow's tax hike," said Shigenori Okazaki, Political Analyst at UBS Warburg.

Murashima pointed out that, Japanese corporate taxes have already been significantly reduced, slashed from 50 per cent to 40.87 per cent over the past decade.