By Tetsushi Kajimoto and Rie Ishiguro
TOKYO (Reuters) - Japanese Prime Minister Yoshihiko Noda won on Tuesday lower house approval for his signature tax-increase plan, but enough ruling party rebels rejected the plan to threaten a break-up of the party which could trigger an early election.
The plan to double the sales tax to 10 percent over three years is seen as a first step towards curbing Japan's snowballing public debt, which already exceeds two years' worth of its economic output, a record for an industrialized nation.
A compromise struck with the opposition in mid-June allowed Noda to break months of policy gridlock and secure the plan's comfortable passage in parliament by 363 to 96 votes.
But 57 ruling Democratic Party of Japan lawmakers voted against the bill.
If 54 or more of them left the party as a result, the Democrats would lose their majority in the more powerful lower house, raising the prospect of an election well before the next one is due by mid-2013.
Critics, led by former Democrat leader Ichiro Ozawa, 70, credited for masterminding the party's 2009 election triumph, argue the tax increase is a departure from a party platform that promised to curb the powerful bureaucracy and cut wasteful spending before raising taxes.
Ozawa has suggested he could leave and form a new party with his followers.
It is not clear, however, how many would follow him and much will depend on what action the party leadership takes against the rebels. Several commentators have suggested the party could let the rebels off with a slap on the wrist to avoid exacerbating the split.
"POSITIVE FOR MARKETS"
While the passage of the tax plan in the opposition-controlled upper house looks assured, the ruling-party split casts doubt over the future of Noda's cabinet and the future of further reforms.
"It looks certain that the sales tax bill will pass the upper house by mid-August. This is positive for the markets although financial markets have already factored in the passage," said Hidenori Suezawa, chief strategist at SMBC Nikko Securities in Tokyo.
"But the positive factor could be more than offset by ensuing political turmoil given such a large number of dissenters from the ruling party."
The loss of a majority could prompt Noda to step down or dissolve the lower house and call a snap election even though he looks set to accomplish a tax breakthrough that he has made the main goal of his 10-month premiership.
Moody's Investors Service welcomed the vote as a decisive step after years of policy drift.
Japan has been hit by a string of credit downgrades in the past two years largely because of its failure to make progress in tackling its debt.
Opinion polls suggest the Democrats would suffer heavy losses in a snap election, but the rival Liberal Democratic Party would also come out well short of a majority.
An inconclusive election could spell more uncertainty and political paralysis.
(Additional reporting by Kaori Kaneko, Stanley White, Teppei Kasai and Kiyoshi Takenaka; Editing by Michael Watson and Robert Birsel)