The announcement on the tax increase by Abe, the first such since 1997, comes even as there is concern in some quarters the move could hurt Japan's economic recovery after years of deflation. Japan is the world's third largest economy behind the United States and China.
"In order to maintain confidence in (the fiscal policy of) Japan and establish a social security system that is sustainable for future generations, I have made a decision to raise the sales tax rate to 8 percent from 5 percent on April 1, 2014," Abe told a meeting ruling party lawmakers, Kyodo News reported.
Simultaneously, Abe announced a 6 trillion yen ($61 billion) economic stimulus package to calm concerns the tax hike could discourage business and consumer spending which could hit the recovery.
Speaking at a news conference, Abe assured the government "can achieve a balance between economic revival and fiscal rehabilitation."
The sales tax could go up by another 2 points to 10 percent in October 2015 but Abe said he will study the economic conditions before "deciding appropriately," Kyodo reported.
Abe also said the government will "seriously consider" lowering corporate tax rates.
As for the country's fiscal situation, public debt is forecast to reach 230 percent of Japan's gross domestic product by next year, the worst among major developed countries.
The Abe government wants to cut the ratio by half by 2015 and turn into a surplus by 2020.
The government's decision to hike the tax rate was partly due to Japan's growing GDP. There have also been other signs of recovery as a result of the Abe government's policies.