Up to 1.5 trillion yen (£8bn; $12bn) in real tax cuts could result, according to Finance Minister Masajuro Shiokawa.

The country's central bank has also said it will buy shares from Japan's troubled banks in a move to avoid a financial meltdown.

But while the news may please the Japanese public, it has raised concerns about Japan's efforts to reduce its massive public debts.

Autumn deadline

Prime Minister Junichiro Koizumi's advisers have proposed that he should order tax cuts of 2.5 trillion yen, or 0.5% of the country's total output, or gross domestic product.

The finance ministry favours a smaller cut.

The tax reform plans ordered by Mr Koizumi should be completed by the end of November.

The draft should take into consideration the government's financial situation and its structural reform policy, Mr Shiokawa said.

Central bank assistance

News of the forthcoming tax cuts came soon after a decision by the Bank of Japan not to inject fresh cash into the economy to help the country overcome its financial crisis.

The bank said it had decided to leave its credit policy unchanged.

But the central bank also said it would step in to assist the country's troubled banking sector by buying some of their shares.

"The central bank must consider measures that will help banks reduce risks from their shareholdings," said Bank of Japan Governor Masaru Hayami .

"We would want to start buying as soon as possible, but the time frame would be strictly limited".

Policy failure?

"This is a big surprise. It shows the Bank of Japan has a real sense of crisis about the state of the economy," said Mitsubishi Securities senior investment strategist Norihiro Fujito.

"I think it is an admission of policy failure," said Merrill Lynch chief economist Jesper Koll.

Bank shares rose sharply on the news, lifting the Nikkei index of leading shares from early lows to a close of 9,472, 0.75% below its opening levels.

Earlier this month, the Nikkei slipped below 9,000, marking a 19-year low.