TOKYO (Reuters) - Japan set ambitious targets to rein in its debt yesterday that it said could not be met even under its rosiest growth scenario, the latest indication that the government will have to push through contentious tax hikes to fill deep fiscal gaps.

In a sharp turnaround from his predecessor, new Prime Minister Naoto Kan has made fiscal reform a top priority ahead of a July 11 upper house election, vowing to consider doubling the five percent sales tax, although not for at least two or three years.

"As shown by the Greek example, the market's view on the size of outstanding public debt or sovereign risk has become very severe," Kan said in a televised debate with other party leaders.

"If we could sustain the social welfare system forever by issuing deficit financing bonds, there would be no need to bring up the issue of the sales tax," he added. "But if left alone, our social welfare system will collapse."

Credit ratings agency Moody's welcomed the plan as a step in the right direction to fiscal health, but analysts said the long-mooted rise in the consumption tax was vital for the targets to be met.

Indeed the Cabinet Office's projections showed that it would not be able to bring the primary budget balance into the black within a decade, as outlined in the fiscal plan, under the government's growth strategy, which aims for an average 2 percent real growth by fiscal 2020/21.

Investors will be watching to see how the tax reform debate progresses after the upper house election, which Kan's Democratic Party needs to win to smooth policymaking.

Yesterday's plan did not factor in any tax hikes but said the government should reach an early conclusion on overhauling the sales tax and other taxes.

The fiscal programme supported government bond prices, with the benchmark 10-year futures prices edging near a two-year high hit earlier this month.