By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's government approved a 4 trillion yen (29.3 billion pounds) emergency budget for disaster relief on Friday without resorting to new borrowing, but it is bracing for heavier reconstruction spending later this year that will require issuing new bonds and, eventually, raising taxes.
Finance Minister Yoshihiko Noda said the government avoided fresh bond issuance out of a determination to maintain fiscal discipline, as Japan grapples with a public debt already double the size of its $5 trillion economy, the worst among industrialised nations.
But additional bond issuance is likely for subsequent extra budgets that will be needed to rebuild after the March 11 disaster, which has left nearly 28,000 dead or missing and triggered the worst nuclear crisis in a quarter century.
"With this budget, we are taking one step forward towards reconstruction after the Great Tohoku Earthquake and towards restarting the economy," Finance Minister Yoshihiko Noda told reporters after a cabinet meeting.
"It is notable that we compiled about a 4 trillion yen budget without issuing new JGBs (Japanese government bonds). It was quite difficult to bring the amount to 4 trillion yen, but we have worked it out."
Tokyo estimates the material damage alone could top $300 billion in the world's costliest natural disaster, while analysts and some inside the Democratic Party-led government have suggested that Japan may eventually need to spend upwards of 10 trillion yen.
The second extra budget should be compiled by autumn at the latest, Katsuya Okada, the Democratic Party's secretary-general, said on Thursday.
TAX HIKES
The heavily indebted government is considering raising taxes including the unpopular sales tax to fund reconstruction, but there is still a lack of consensus on the politically sensitive issue.
"If the government can take this opportunity to change the social welfare and tax system, it could be a turning point rather than a tipping point," said Naomi Hasegawa, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
"Investors want reassurances that reconstruction spending will be backed by an increase in the sales tax," she said, adding that a 3 percentage point hike would generate 7.5 trillion yen in extra revenue each year.
JGBs gained after the government kept its promise of not issuing new bonds to fund the first emergency budget, helping to push the 10-year yield to a four-week low.
Market players nevertheless remained cautious since more debt issuance will be needed in the future to pay for reconstruction, although Japan does not now face a Greece-style debt crisis since its public debt is held almost entirely by domestic investors.
The cabinet plans to submit the emergency budget -- which includes about 1.6 trillion yen of infrastructure-related spending -- to parliament on April 28. Noda said he hoped that it would be enacted as soon as possible.
The actual size of the extra budget is only 305.1 billion yen, with the bulk of the 4.0153 trillion yen in outlays to be financed through spending cuts in foreign aid, payouts to families with children and other existing programmes.
The government is also tapping reserves for pension payouts -- seen as a sacred cow in a fast-ageing society where each retiree will be supported by fewer than two workers by 2030, and the opposition opposes this approach.
Japanese Prime Minister Naoto Kan said on Friday he planned to explain early next month how Tokyo should steer the economy and reconstruction after last month's natural disaster.
(Additional reporting by Stanley White; Editing by Edmund Klamann)