UPDATE 2-Japan’s first extra budget likely at 2 trln yen-Nikkei

* More extra budgets needed, spending may top Y10 trln –

* Some in govt want income tax hike to pay for costs –

(Adds details, background)

By Leika Kihara and Tetsushi Kajimoto

TOKYO, March 30 (Reuters) – Japan’s government is likely to
set aside 2 trillion yen ($24.3 billion) for disaster relief in
its first emergency budget and aims to submit the bill to
parliament in April, the Nikkei newspaper reported on Wednesday.

The government will probably need two more extra budgets for
reconstruction in the wake of the devastating earthquake and
tsunami that hit northeast Japan on March 11, and total spending
may exceed 10 trillion yen, the paper said.

The first extra budget will be mainly funded by 1.16
trillion yen in emergency reserves in the main state budget for
the next fiscal year starting in April, with the balance covered
by cuts in other spending, the Nikkei said without citing
sources. For further funding some government officials were
suggesting a temporary additional income tax, Nikkei said.

The Finance Ministry declined to comment on the report.

On Tuesday, Kyodo news agency said Prime Minister Naoto Kan
was looking for spending 2-3 trillion yen in the first emergency

Government sources also told Reuters last week that spending
cuts could cover much of the first emergency budget, although
further budgets will likely require new

Japan’s parliament on Tuesday passed the regular $1.1
trillion budget for the year from April 1, but it still needs to
pass a bill needed to issue bonds to fund some of the spending,
both in the regular and extra budgets. [ID:nL3E7ES3J5]

The ruling Democratic Party, which needs opposition votes in
the upper house to pass the bill needed to finance about 41
percent of the 2011/12 budget, has signalled readiness to scale
back key spending plans, including child care support and
toll-free highways.

But government officials say it will be difficult to
roll-back all of the spending pledges worth more than 3 trillion
yen — something the main opposition Liberal Democratic Party
wants –given concerns that this could alienate voters ahead of
local elections due next month.

The government is still juggling delivering aid to the
worst-hit areas with a protracted battle to contain the world’s
worst nuclear crisis since Chernobyl 25 years ago.

It estimated last week the damage to roads, homes, factories
and other infrastructure from the magnitude 9.0 quake and deadly
tsunami could top $300 billion, making it the world’s costliest
natural disaster.

Kan said on Tuesday Japan has not ruled out any source of
funding for reconstruction, including a tax increase or
abandoning a plan to cut corporate tax.

The government expects tax revenues to fall sharply due to a
weaker economic activity and some in the government are floating
the idea of temporarily raising income tax rates, the Nikkei
said. It said an additional 10 percent income tax was considered
for a period of 3 to 5 years to meet redemption costs for bonds
that may be issued to pay for reconstruction.

Government sources told Reuters last week that tax hikes
could be an option to fund post-quake rebuilding, citing special
corporate and petroleum taxes adopted in 1991/92 to help finance
Japan’s $9 billion contribution to a “peace fund” established
after the Gulf War.

But some analysts say tax hikes would do more harm than good
to the economy reeling from a triple blow of the earthquake,
tsunami and a nuclear crisis.

They say the preferred option would be a combination of
spending cuts and other budget savings and new borrowing.
($1 = 82.480 Japanese Yen)

(Editing by Tomasz Janowski)

UPDATE 2-Japan’s first extra budget likely at 2 trln yen-Nikkei