By Leika Kihara

TOKYO, Jan 19 (Reuters) - Japan's expected snap general election is increasingly likely to lead to a cut in the consumption tax rate, as ruling and opposition party executives stressed the need to do so to cushion the hit to households from rising living costs.

The growing prospect of a cut to the tax, which would leave a huge hole in state revenues and worsen Japan's already precarious finances, sent the yield on the 10-year Japanese government bond to a 27-year high of 2.23% on Monday.

Japan levies an 8% consumption tax on food and a 10% rate on other goods and services, which is a key source of funding for rising social welfare costs in a rapidly ageing population.

Shunichi Suzuki, secretary-general of the ruling Liberal Democratic Party (LDP), pointed to the party's earlier agreement with its coalition partner, Ishin, to aim at scrapping the 8% levy on food sales for two years.

"It's our basic stance to sincerely achieve what's written in the agreement," he told a television programme on Sunday.

The Mainichi newspaper reported on Saturday that Prime Minister Sanae Takaichi, upon calling a general election next month, may pledge to temporarily scrap the 8% levy on food sales.

Japan's top government spokesperson, Minoru Kihara, on Monday said a cut in the consumption tax "isn't ruled out as an option."

The main opposition Constitutional Democratic Party of Japan, which agreed to form a new political party with Komeito, also saw the merits of cutting the tax rate, Secretary-General Jun Azumi said on Monday.

Komeito executive Makoto Nishida went a step further, saying that Japan could create a new sovereign wealth fund to generate revenue for a permanent tax cut.

"By creating a permanent source of revenue, we can permanently abandon the consumption tax levied on food," Nishida said on Monday.

Officials from other major opposition parties have also called for lowering or eliminating the consumption tax.

Takaichi will hold a news conference at 6 p.m. (0900 GMT) on Monday to say she intends to call a snap election in February, capitalising on her strong approval ratings.

BLOW TO COFFERS

Inflation has exceeded the Bank of Japan's 2% target for nearly four years due largely to stubbornly high food prices, an issue that has led to growing calls from politicians for major spending and tax cuts to cushion the blow on households.

The LDP has long pushed back against opposition calls for a consumption tax cut with the view that doing so would erode market trust in Japan's resolve to get its fiscal house in order.

Since taking office in October, Takaichi has ruled out a cut, believing it would take too long to pass necessary legislation and that payouts and subsidies would more quickly deliver benefits to households.

But Takaichi, known as an advocate of aggressive fiscal spending, once said she would prefer cutting the tax if the government could find a sufficient source of revenue.

A cut in the 8% food sales levy would reduce government revenue by an estimated 5 trillion yen ($31.71 billion) a year, according to government data, which is roughly the same amount Japan spends annually on education.

A permanent cut would strain Japan's already severe finances and heighten the risk of a bond selloff as investors focus on Takaichi's expansionary fiscal policy, analysts say.

Under Takaichi, the government has compiled a record $783 billion budget for next fiscal year on top of a stimulus package focused on easing the pain from a rising cost of living.

"I can't see why Japan needs a consumption tax cut after compiling a significant stimulus package to counter rising inflation," said Keiji Kanda, a senior economist at the Daiwa Institute of Research.

"I'm worried these steps could accelerate inflation and lead to further rises in bond yields," he said.

($1 = 157.6900 yen)

(Reporting by Leika Kihara; additional reporting by Makiko Yamazaki; Editing by Paul Simao and Thomas Derpinghaus)