By Tetsushi Kajimoto and Rie Ishiguro
TOKYO (Reuters) - Japanese Prime Minister Yoshihiko Noda faced on Tuesday a split in his party that could trigger a snap election after his signature tax-increase plan cleared parliament's lower house despite its rejection by a group of ruling party rebels.
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 through the lower house.
But 57 ruling Democratic Party of Japan (DPJ) members of parliament cast blue ballots as they passed in procession in front of the house speaker, showing a vote 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.
In a culmination of days of scrutiny of the Democrats' scramble for unity, several television channels broadcast the vote and the tally live, highlighting the number of DPJ members voting against the tax.
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.
Many people are also wary of raising the tax at a time when Japan's recovery from last year's triple blow of a big earthquake, tsunami and nuclear crisis is not yet assured.
But Noda said Japan had no time to waste.
"We've always been delaying decisions," he told a news conference. "I want to create a political environment where we don't put off decisions. Approval at the lower house today is a big step forward in this direction."
Ozawa's criticism of the tax plan stirred speculation that he planned to form a new party with his followers. But after the vote, he said he would try one more time to convince fellow Democrats to ditch the plan before deciding what to do next.
"I will make the final decision after making my last effort," the veteran dealmaker said.
Political commentators said much would depend on what the party leadership would do with the rebels. Noda said they would be dealt with "strictly", but it was not clear whether the Democrats would go as far as expel them, something they have not done in the past with dissenters.
A senior Democrat official said the party would make a decision well before the tax bill goes to the upper house.
Moody's ratings agency and market analysts welcomed the passage of the tax plan as a long overdue step in a long road to fiscal health.
"After years of policy drift, the government has taken decisive measures to address its fiscal deficit," Tom Byrne, Moody's senior vice president and regional credit officer for Asia and the Middle East told a news conference.
Analysts welcomed the vote but said the deepening rift in the ruling party was a cause for concern with the future of Noda's cabinet and further reforms in doubt.
"It looks certain that the sales tax bill will pass the upper house by mid-August," said Hidenori Suezawa, chief strategist at SMBC Nikko Securities.
"But the positive factor could be more than offset by ensuing political turmoil."
The loss of a majority could prompt Noda to call a snap election, which opinion polls suggest the Democrats would lose badly.
But the rival Liberal Democratic Party (LDP) is also likely to come out well short of a majority and an inconclusive election could spell more uncertainty and political paralysis.
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.
While the tax plan's approval marks a milestone for a nation long trapped in a cycle of revolving-door governments and policy gridlock, it comes at a political and economic price.
Many Democrats feel they ended up essentially adopting policies of the LDP they ousted three years ago.
The compromise that paved the way for the tax deal also put on the back burner any serious debate about the shape of pension and healthcare reform essential to restoring fiscal health.
(Additional reporting by Kaori Kaneko, Stanley White, Teppei Kasai and Kiyoshi Takenaka; Writing by Tomasz Janowski; Editing by Michael Watson and Robert Birsel)