Japan eyes sales tax rise to pay for post-quake rebuild

TOKYO (Reuters) - Japanese consumers may have to help foot the reconstruction bill after last month's earthquake and tsunami caused $300 billion (184 billion pounds) of damage, further burdening the hugely indebted economy, a newspaper said Tuesday.

It would be the first increase since 1997, though a sales tax had been the subject of fierce political debate before the earthquake struck as one way for Japan dig itself out of its massive debt.

The government is considering raising the tax by 3 percentage points to 8 percent when the new fiscal year starts next April, the Yomiuri newspaper reported.

"It was clear even before this disaster and the need to secure funds for reconstruction that to ensure a sustainable fiscal situation, some sort of reform of spending and revenues was necessary," said Internal Affairs Minister Yoshiro Katayama.

"The debate over the fiscal situation is not something that began with this disaster," he told reporters.

The government hopes to avoid issuing new bonds to fund an initial emergency budget, expected to be worth about 4 trillion yen (29 billion pounds), due to be compiled this month.

But bond issuance is likely for subsequent extra budgets which will only make it harder for Japan to rein in its debt, already running at twice the size of the $5 trillion economy.

The mood among consumers about the prospects for jobs and incomes darkened in March after the quake, a Cabinet Office survey showed.

Though the triple disasters of quake, tsunami and nuclear crisis are bad news for the Japanese economy, the damage is not expected to spill over across the region.

The Asian Development Bank's chief economist said he saw little sign of a serious negative impact on other Asian economies.

The government says it has not yet decided how to fund the rebuilding cost but the Yomiuri said it had ruled out raising income and corporate taxes.

"I am aware that the Democratic Party is considering various methods, including this (tax rise). But the government is not considering any specific funding methods at this stage," top government spokesman Yukio Edano told a news conference.

Katsuya Okada, secretary-general of the ruling Democratic Party (DPJ), said Sunday taxes had to rise to repay new government bonds that will be needed to pay for reconstruction.

A poll by the Nikkei business daily showed about 70 percent of Japanese voters would support a tax hike, but want unpopular Prime Minister Naoto Kan to be replaced.

IMPACT OF NUCLEAR CRISIS

As well as trying to deal with the consequences of quake and tsunami which killed at least 13,000 and left tens of thousands homeless, Japan is struggling to control the Fukushima Daiichi nuclear power plant that began leaking radiation when it was nearly destroyed by the natural disasters.

Plant operator Tokyo Electric Power (TEPCO) said it had started removing highly contaminated water from one of the reactors, a key step to repair the cooling system that regulates the temperature of radioactive fuel rods.

It wants a "cold shutdown" of the plant in six to nine months, setting a timeframe for bringing the world's worst nuclear crisis in 25 years under control.

The damage to Fukushima Daiichi, and the shutdown of other nuclear power plants, has caused power outages that exacerbate the disruption to manufacturing supply chains and overall economic activity.

Toshiba has cut its 2010/11 operating profit estimate, blaming the disaster. Earnings at cellphone venture Sony Ericsson, due later, were expected to shed light on the size of the earthquake's impact on the cellphone industry.

Chip maker Texas Instruments warned of slower-than-usual quarterly sales growth as it scrambles to restart production after the quake, and said it was unclear when the supply of the silicon and wafers it needs will return to normal.

Japanese corporate confidence plunged by a record amount in April and is seen worsening further, a Reuters poll showed last week.

(Additional reporting by Yoko Kubota; Writing by Daniel Magnowski; Editing by Jonathan Thatcher)