Japan should rely primarily on raising the sales tax to generate extra revenue, and may need to raise it to as high as 26% to achieve a large primary surplus, the Organisation for Economic Cooperation and Development (OECD) said.

The national sales tax is scheduled to rise to 10% in October, from 8% now to help pay for rising healthcare costs.

"The Bank of Japan should remain focused on achieving its 2% inflation target, but there are signs its purchases of exchange-traded funds (ETFs) are distorting the stock market. Policymakers need to curb healthcare spending and raise revenue to pay down debt, but this could decrease the chance of fostering sustainable inflation," the OECD said in an economic survey of Japan.

"Japan's spending on welfare and healthcare has doubled to 22% of GDP from 11% of GDP over the past 25 years, which is why increasing revenue is an urgent task, The country's outstanding government debt is more than twice the size of its $5 trillion economy, another reason Japan needs to pursue fiscal discipline." the OECD said.