Japan mulling extra budget for economic stimulus

By Yuzo Saeki

TOKYO, Aug 22 (Reuters) - The government is considering an extra budget to finance steps to support Japan's economy against the effects of higher living expenses and costs for businesses.

The move underscores speculation of large-scale public spending, with the junior partner in the ruling coalition calling for steps worth more than 1 trillion yen ($9.19 billion), but has prompted concern about hindering efforts to rein in public debt.

Economics Minister Kaoru Yosano said on Friday that Prime Minister Yasuo Fukuda and senior cabinet members, including Finance Minister Bunmei Ibuki, had agreed to start preparing for a possible extra budget.

Although the size of the package is uncertain, Yosano said measures are likely to be mapped out next week.

The possibility of an extra budget has become an issue because the government could fund it by reallocating existing spending or by tapping into budget reserves rather than issuing more debt, depending on its size.

Akihiro Ota, the leader of the New Komeito party, the junior partner in the ruling coalition, told Reuters on Friday the government should spend more than 1 trillion yen on the measures.

"Emergency measures are necessary and we need to stop the bleeding," Ota said in an interview. "If businesses cannot continue, it would render a further blow to the economy."

The government has said it will compile an economic package this month to help businesses and individuals cope with rising energy and food prices amid heightening fears of a recession in the world's second-biggest economy.

But given Japan's huge public debt, the government has said the package will differ from past measures that focused on stimulating demand through increased public spending.

Ota said the government could use part of reserves held in special accounts to fund the package, and issuing new debt-covering bonds was not a prerequisite.

That echoed remarks by Ibuki, who said on Friday he is not thinking of an issue of government bonds to finance the measures.

The government has transferred 1.8 trillion yen from a special account for foreign currency assets acquired through market intervention to help finance the general account budget for the fiscal year to next March.

In an effort to rein in the debt, Fukuda has reiterated that the government will uphold its aim of achieving by 2012 a "primary balance" under which general spending excluding debt servicing is matched by revenues without new debt issuance.

Ota said the target should be kept, but that the economic situation is different from 2006 when it was set.

"We need to first have an emergency economic policy," Ota said. "Unlike the government's way of thinking that stresses managing finances, we are looking at people's livelihoods."

Tokyo resorted to a series of economic packages featuring large spending on public work projects in the 1990s when the economy was languishing in the aftermath of the bursting of an asset bubble. That led public debt to snowball.

Japan's public debt amounts to about 1-½ times gross domestic product, the highest ratio among industrial nations. ($1=108.86 Yen) (Additional reporting by Linda Sieg; Editing by Michael Watson)