TOKYO - Japan should avoid rushing into raising capital gains tax as doing so could send a wrong message to markets when Japan is encouraging financial investment, a senior government official said on Sunday.

"Strengthening taxation could send a wrong signal that runs counter to our aim of expanding investment," Deputy Chief Cabinet Secretary Seiji Kihara said in a programme on broadcaster FNN, referring to capital gains tax.

The tax has been contentious since Prime Minister Fumio Kishida swept to power last year pledging to review what is seen an unfair tax that favours the rich earning hefty financial investment income.

In Japan, differences between the income tax and capital gains tax rates causes what is known as the wall of 100 million yen, at which the effective tax rate on financial investment income starts to decline.

Kihara's comment comes as the tax commission of Kishida's Liberal Democratic Party (LDP) is debating the issues as part of an annual tax-code review.

Separately, Kihara said the government was committed to boosting defence even though the funding for it was still in question, especially after a five-year spending plan ends in 2027.

"We must do what we should do regardless of whether there are funding sources or not," Kihara said. "The question is how to secure firm funding sources beyond 2027. We must first tackle spending reform, and if that's not enough we might ask everyone to share the burden broadly."

Last month, Kishida told his ministers to double the share of military outlay to 2% of gross domestic product within next five years in the face of regional threats such as increasingly assertive China and unpredictable North Korea.

(Reporting by Tetsushi Kajimoto; Editing by Robert Birsel)