My thanks to Richard Katz and Arthur Alexander for characteristically vigorous and informative posts. I'd like to make one clarification, and then ask two questions (slightly rhetorical but mostly sincere).
First the clarification: my main concern has been to try to understand what factors might be driving Prime Minister Noda to persist in what appears to be the fool's errand of raising taxes, not to explicate my own policy preferences. For what it is worth, my preferences are not that different from those expressed by Richard Katz, though probably a little more driven by concerns for political viability, as well as by the concern that Japan does not have unlimited time to reignite the economy and use growth to reduce debt, and that policy commitments, such as the central government's promise to support a revised pension system, inevitably will require large increases in revenue.

Now for the questions. First, Arthur points out that old people are healthier than in the past. Therefore, they should be able to work later, thus reducing some of the financial burden of demographic aging. Question:
even if older people are healthier than in the past, will they be as productive? Or more to the point, will employers and labor practices allow them to be as productive? For all the increase in temporary workers and the talk of the death of permanent employment, mass hiring on April 1st (and no other time of year, i.e.
shin-sotsu ikkatsu sai-you) remains the norm, and age discrimination in Japan seems more virulent than ever.
So even if people work until later ages, will they be stuck in marginal jobs, or will they contribute mightily to economic growth and tax revenues? Will the now modest but soon steep decline in 15-64 year olds actually lead to more productive employment of older people (and women, as Arthur suggests), or just impose more overwork and karoushi on the shrinking pool of permanent (mostly male) employees?

Second, if a significant part of Japan's problem is weak corporate governance that allows companies to continue indulging in relatively unproductive investment, what does that imply for financial institutions, now the biggest buyers of Japanese government bonds? If banks take corporate governance and thus risk management more seriously (instead of just relying on government promises or blandishments), won't they have to reduce their holdings of JGBs, or at least slow down their purchases, thus forcing the Japanese government to rely more on foreign investors, who would demand a much higher risk premium? Already Japanese financial institutions are talking this way in public, which strikes me as a sea change. How serious are they? There seems to be a clash between macroeconomic forces, which (as Richard notes) imply that domestic demand for JGBs will remain strong for at least a couple of years, and possibly even a decade or more, and risk management at the level of individual economic actors such as banks or households, which would seem to suggest that the government will face a steadily rising risk premium. The obvious equilibrating force would be portfolio diversification: Japanese would buy fewer JGBs and more foreign assets, and foreigners would buy more JGBs--at a higher premium.
Given the huge backlog of outstanding debt, that would exert a crushing burden on Japanese government expenditures, create political upheavals, and perhaps toss a bunch of professors out on the street.
PS: Note that public servants, and quite possibly faculty and staff at national universities, are looking at the likelihood of a 7.8% wage cut, while everyone worries about the viability of their pensions. The pressure on expenditures is becoming painful. Tax hikes don't necessarily look so bad in comparison.