Japan's first extra budget likely at 2 trillion yen

Japan's government is likely to set aside 2 trillion yen (USD 24.3 billion) for disaster relief in its first emergency budget and aims to submit the bill to parliament in April, the Nikkei newspaper reported on Wednesday.

The government will probably need two more extra budgets for reconstruction in the wake of the devastating earthquake and tsunami that hit northeast Japan on March 11, and total spending may exceed 10 trillion yen, the paper said.

The first extra budget will be mainly funded by 1.16 trillion yen in emergency reserves in the main state budget for the next fiscal year starting in April, with the balance covered by cuts in other spending, the Nikkei said without citing sources. For further funding some government officials were suggesting a temporary additional income tax, Nikkei said.

The Finance Ministry declined to comment on the report.

On Tuesday, Kyodo news agency said Prime Minister Naoto Kan was looking for spending 2-3 trillion yen in the first emergency package.

Government sources also told Reuters last week that spending cuts could cover much of the first emergency budget, although further budgets will likely require new borrowing.

Japan's parliament on Tuesday passed the regular USD 1.1 trillion budget for the year from April 1, but it still needs to pass a bill needed to issue bonds to fund some of the spending, both in the regular and extra budgets.

The ruling Democratic Party, which needs opposition votes in the upper house to pass the bill needed to finance about 41% of the 2011/12 budget, has signalled readiness to scale back key spending plans, including child care support and toll-free highways.

But government officials say it will be difficult to roll-back all of the spending pledges worth more than 3 trillion yen -- something the main opposition Liberal Democratic Party wants --given concerns that this could alienate voters ahead of local elections due next month.

The government is still juggling delivering aid to the worst-hit areas with a protracted battle to contain the world's worst nuclear crisis since Chernobyl 25 years ago.

It estimated last week the damage to roads, homes, factories and other infrastructure from the magnitude 9.0 quake and deadly tsunami could top USD 300 billion, making it the world's costliest natural disaster.

Kan said on Tuesday Japan has not ruled out any source of funding for reconstruction, including a tax increase or abandoning a plan to cut corporate tax.

The government expects tax revenues to fall sharply due to a weaker economic activity and some in the government are floating the idea of temporarily raising income tax rates, the Nikkei said. It said an additional 10% income tax was considered for a period of three to five years to meet redemption costs for bonds that may be issued to pay for reconstruction.

Government sources told Reuters last week that tax hikes could be an option to fund post-quake rebuilding, citing special corporate and petroleum taxes adopted in 1991/92 to help finance Japan's USD 9 billion contribution to a "peace fund" established after the Gulf War.

But some analysts say tax hikes would do more harm than good to the economy reeling from a triple blow of the earthquake, tsunami and a nuclear crisis.

They say the preferred option would be a combination of spending cuts and other budget savings and new borrowing.

(USD 1 = 82.480 Japanese Yen)