Japan eyes tax hikes, stake sales for rebuilding

TOKYO (Reuters) - Japan's government proposed on Friday tax hikes worth around $146 billion (92 billion pounds) and selling stakes in a tobacco company and Tokyo's subway operator to help fund rebuilding from the devastating March 11 earthquake and tsunami.

The heavily indebted government faces a balancing act to secure funding for Japan's biggest rebuilding effort since the aftermath of World War Two without further straining its finances or choking off a frail economic recovery.

Income, corporate and consumption tax increases were among the options a government tax panel said it had proposed. Rises in other taxes such as those on tobacco, alcohol and gasoline were also suggested as the government seeks to raise 11.2 trillion yen (92.5 billion pounds).

To limit the tax burden, Tokyo is seeking to sell stakes in Japan Tobacco Inc and unlisted Tokyo Metro to fund rebuilding in areas devastated by the magnitude 9.0 quake and tsunami that left about 20,000 people dead or missing and triggered the world's worst nuclear crisis since the 1986 accident at Chernobyl.

"It is by no means easy for politicians to ask the people to shoulder a tax burden," Finance Minister Jun Azumi told reporters earlier on Friday.

"Since we are determined not to pass the debt to the next generation after such an unprecedented disaster, we have no choice but to ask for some burden on individuals and companies."

The Cabinet Office estimates that the proposed tax hikes could knock as much as 0.24 percentage points off Japan's real GDP growth in the first year if they were implemented from the fiscal year that starts next April.

THREE OPTIONS

In outlining its proposals, the government presented three options for tax increases for debate among ruling party officials from next week, before compiling a third extra budget to fund the rebuilding of the disaster-hit northeast.

Tokyo has already passed two supplementary budgets worth a total of 6 trillion yen and plans to spend 13 trillion yen more over five years, with the bulk of the spending to be covered by the next budget due some time next month.

The government is considering funding most of the third budget, expected to be worth around 11 trillion yen, with reconstruction bonds, a source close to the matter told Reuters on Thursday.

Extra tax revenues would be used to redeem the maturing bonds over a period of up to 10 years, according to the proposals.

The larger-than-expected bond issuance would add to a debt pile that is already double the size of Japan's $5 trillion economy, although so far there have been no signs of strain in the Japanese government bond market, which is dominated by domestic investors.

Benchmark 10-year bonds are currently yielding just 1 percent, compared with around 2 percent for U.S. Treasuries of the same maturity.

LIMIT TAX BURDEN

Azumi said increases in income and corporate taxes would provide the bulk of reconstruction financing, while the government would seek other sources of financing to limit the tax burden.

The government tax panel proposed on Friday tapping non-tax revenues of 5 trillion yen, up from 3 trillion yen Tokyo was previously seeking.

To achieve this, Azumi said he would consider selling the state's holdings in Japan Tobacco and Tokyo Metro, calling them "leading options."

The government holds 50 percent of Japan Tobacco, valued at about 1.74 trillion yen, and 53 percent of Tokyo Metro, worth around 175 billion yen.

Japan Tobacco, the world's third-largest cigarette maker, has been lobbying the government for years to sell more of its stake. But to cut its stake, the government would have to go through a time-consuming process to change a law requiring it to hold half of the former state monopoly.

The Democratic Party has yet to form a consensus on funding strategies, with some arguing that the corporate tax, which the government has pledged to cut by 5 percentage points, should be left alone while others are pushing for increases in the sales tax as a funding tool.

The ruling party would then need to persuade a hostile opposition, which controls parliament's upper house, to agree on the tax plans. Tax hikes are hugely unpopular in Japan, although polls have shown the public is willing to accept temporary increases to pay for rebuilding from the disaster.

Since before the March disaster, the Democrat-led government has been seeking a cut in the corporate tax rate -- one of the highest among industrialised countries at around 40 percent -- to discourage a hollowing out of Japan's manufacturing sector and promote domestic investment.

With a rising yen threatening to derail the economy's recovery from a recession triggered by the March disaster, a ruling party policy panel proposed creating a fund to mitigate the strong currency's impact as one of its recommendations for the third extra budget.

The panel also called for tapping Japan's $1.2 trillion in foreign reserves to support corporate fund-raising as concerns mount over financial market strains from Europe's sovereign debt crisis.

(Additional reporting by Sumio Ito; Editing by Alex Richardson and Edmund Klamann)

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