Politicians from his own ruling Liberal Democratic Party (LDP) turned up the heat on Hashimoto, criticising him for "wavering to and fro" on the issue.Calls for permanent tax cuts dominated a party meeting, which was held to discuss the party's recently announced measures to tackle the financial sector's bad-loan mess.

"Calls in favour of a permanent tax cut were in the majority," Takashi Kosugi, a senior LDP official, told reporters after the meeting.

Tokyo's trading partners also have joined in on the tax debate.

European trade commissioner Sir Leon Brittan said on Tuesday that Japan must cut taxes and accelerate deregulation in order to stimulate more domestic demand.

The calls come as financial markets waited in anticipation for Hashimoto to clarify his stance on permanent income taxcuts.

All eyes on Wednesday were directed at a news conference by Hashimoto in late evening. A major newspaper, the Yomiuri Shimbun, said the prime minister might announce permanent income tax cuts at the news conference.

The newspaper, citing no sources, said Hashimoto had decided to announce plans for sweeping tax system reform, including permanent tax cuts.

The news conference is in the central city of Nagoya, where Hashimoto was campaigning for his party ahead of Sunday's election for half the seats in parliament's Upper House.

Taku Yamasaki, the ruling LDP's policy chief, fueled the markets' expectations on Wednesday by telling a party meeting that from now on, the LDP would clarify its stance on the tax cut "more definitely". Growing hopes for a tax cut announcement pushed Japanese share prices up, with the key Nikkei stock average closing up 114.69 points, or 0.70 per cent, at 16,530.97. The yen and the yield of key Japanese government bonds also rose.

The debate over permanent income taxcuts intensified after a Hashimoto campaign speech last week was interpreted by domestic media as meaning permanent income tax cuts were possible after the Upper House election on July 12.

But Hashimoto on Sunday said his remarks were misinterpreted, adding he did not mention permanent tax cuts. "I just said we would review the tax system to make permanent reforms," Hashimoto said.

Opposition party leaders criticised Hashimoto for what they saw as his ambivalent stance, with some arguing his comments were election-related.

Meanwhile, on Wednesday, a member of the government's tax panel told Reuters it was unclear if reform of the tax system would yield net permanent income tax cuts. Haruo Shimada said if the maximum combined rate for national and local income taxes -- which at about 65 per cent is one of the highest in the industrialised world -- was cut, then the minimum tax threshold might be lowered to finance this.

"In that case, all in all (income) taxes may not have a permanent net cut," hesaid in an interview.

While financial markets welcomed the stronger likelihood of the tax cuts being implemented, some remained sceptical of their effect on the economy.

Permanent income tax cuts will not ensure an economic recovery for Japan, as past temporary income tax cuts have not led to a jump in consumption, Kazuo Aichi, a senior LDP official, said on Wednesday.

"What we need is an overall structural reform of the tax system. This will revitalise the Japanese economy, though there may be some time lag," Aichi said in an interview.