Japan plans spending package as quake slams world's most indebted economy

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Japan aims to compile a package to fund the rebuilding effort after its strongest earthquake on record, a step that may worsen the challenge of reining in the world's biggest public debt.

The northern Tohoku region most affected by the disaster accounts for about 8 percent of gross domestic product, and is host to factories making products from cars to beer. It also has energy infrastructure including a nuclear power plant that the government said is at risk of a meltdown after an explosion.

Factory shutdowns, power cuts and the impact on consumer confidence may hurt Japan's GDP for a period of months, while contributing to growth later as reconstruction occurs, economists said. The additional public spending risks hurting demand for Japanese government bonds, said analyst Alicia Ogawa.

Policy makers will need to compile a spending package "over the medium to long-term" to cope with the aftermath of the 8.9-magnitude earthquake and the tsunami it triggered, Chief Cabinet Secretary Yukio Edano told NHK Television. Officials will use about 200 billion yen (US$2.4 billion) left over from the budget for the fiscal year ending March 31 to pay for the recovery effort, he said, adding that local elections scheduled for next month may be delayed.

"˜Leg down'

"A supplementary budget is like the last thing that people watching the JGB market want to hear," said Ogawa, adjunct professor at Columbia University's School of International and Public Affairs in New York, and a former Japanese banking analyst who lived in the nation for 15 years. The prospect of rebuilding "signals another leg down in Japan's fiscal health. So I'm concerned that in the short to medium run, there's going to have to be more borrowing," she said.

Finance Minister Yoshihiko Noda told reporters in Tokyo that it will be "difficult" to compile the extra spending package before month-end. Edano said today the Cabinet plans to meet this evening to discuss the temblor's economic impact.

The Ministry of Finance projected in January that government debt will increase 5.8 percent to a record 997.7 trillion yen ($12.2 trillion) in the year starting April 1. That signaled Prime Minister Naoto Kan would break his pledge to limit bond sales to 44.3 trillion yen a year. US government debt held by the public is less than $10 trillion.

Financing bill

For Kan, the task of assembling a reconstruction plan adds to a burden that includes his failure so far to persuade opposition lawmakers to enact bills allowing the government to sell deficit-financing bonds in the coming fiscal year. The largest opposition party has signaled it's prepared to endorse post-earthquake spending.

"We will probably need a supplementary budget to work on this," Sadakazu Tanigaki, who heads the Liberal Democratic Party, told reporters March 11 after Kan convened a meeting of party leaders. "We will cooperate with all our might."

Japan's bond market has so far failed to signal concern at the fiscal outlook, with more than 90 percent of government debt held by domestic investors led by financial companies. The yield on the benchmark security due in 2021 was 1.27 percent late March 11 in Tokyo, compared with an average of 1.39 percent over the past decade.

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