UPDATE 2-Japan Noda warns on debt pile in budget battle

* Cabinet Sec Sengoku: spending cuts to be re-allocated

* Sengoku: to set aside more than Y1 trln to support growth

* Democratic Party officials wrangle over budget guidelines
(Adds investor’s quote, graphic, details)

By Stanley White

TOKYO, July 26 (BestGrowthStock) – Japan’s government cannot keep
relying on excessive bond issuance to fund fiscal spending, the
finance minister warned on Monday, as ruling Democratic Party
officials wrangle over spending for next fiscal year.

Japan is struggling to balance reining in its public debt
with supporting growth and beating deflation, and the cabinet is
expected to approve guidelines on Tuesday for budget requests
for the fiscal year starting next April.

Chief Cabinet Secretary Yoshito Sengoku told reporters the
government would set aside more than 1 trillion yen ($11.4
billion) in the 2011/12 budget to support growth, less than the
2 trillion yen some in the party had asked for.

Sengoku also said ministries would have to make what he
called spending cuts of 10 percent, but later he made clear this
would simply be a reallocation of spending to areas with growth
potential. [ID:nTKX006904]

Prime Minister Naoto Kan’s government has already agreed to
cap general spending next year at this year’s level and to limit
new bond issuance to 44.3 trillion yen.

But the strength of this commitment has come into doubt
after an upper house election defeat, which has left Prime
Minister Naoto Kan’s Democrats without enough seats to pass
legislation on their own and has raised the spectre of party

“The government will be forced to take austerity measures
because of its fiscal position,” said Akira Takei, general
manager of international fixed-income investment at Mizuho Asset
Management in Tokyo.

“If the government fails to do its job interest rates will
rise and this would be the canary in the tunnel. This is a
problem all major economies face.”
Graphic on Japan’s debt woes http://r.reuters.com/sez92m
Factbox on ratings agencies’ warnings [ID:nTOE66C03G]
More stories on Japan’s economy [ID:nECONJP]

Credit agencies have warned of possible downgrades to
Japan’s debt rating as the Democratic Party’s loss in the upper
house election jeopardised efforts to rein in the country’s huge
public debt.

Japan’s public debt is nearly twice the size of its $5
trillion economy, the worst ratio among industrialised nations.

“Our finances are in the worst state compared with other
developed countries and it is difficult to rely on bond
issuance,” Finance Minister Yoshihiko Noda said at a meeting of
regional finance bureau chiefs.

“We must work to rebuild our finances.”

Investors have become sensitive to public-sector finances
after Greece obscured the size of its debts, which rattled
confidence in other countries’ debt burdens, sent bond yields
soaring and pummeled the euro (EUR=: ).

Governments across Europe have been forced to talk tough on
reining in their budget deficits to ease investor concerns.

Japan’s government has said it will cap general spending,
which includes tax grants to local governments but excludes debt
servicing costs, at 71 trillion yen in next year’s budget.

Within that 71 trillion, Democratic Party policy chief
Koichiro Gemba originally asked for 2 trillion yen to be
earmarked for the government’s economic growth strategy and the
party’s campaign pledges.

This month’s election rout also led to an embarrassing
climb-down for Kan, as he abandoned plans to give the National
Strategy Bureau more power to oversee the budget process,
raising questions as to who takes the lead in fiscal

The Democrats originally saw the bureau as a way to wrest
power from bureaucrats and special interest groups over spending

Stock Market Research

($1=87.44 Yen)
(Editing by Charlotte Cooper)

UPDATE 2-Japan Noda warns on debt pile in budget battle