UPDATE 3-Japan extra budgets may top 10 trln yen, special tax eyed

* Need to consider bond market impact in extra budgets –
deputy finmin

* Deputy finmin signals extra budgets may top 10 trln yen

* Government plans bill that may allow BOJ’s bond
underwriting-Nikkei

* Government considering extra taxes, special bonds -Nikkei

(Updates with Nikkei on special tax, BOJ’s possible bond
underwriting)

By Rie Ishiguro and Kaori Kaneko

TOKYO, March 31 (Reuters) – Japan’s government may need to
spend over 10 trillion yen ($120 billion) in emergency budgets
for post-quake disaster relief and reconstruction, with part of
them possibly covered by new taxes, deputy finance minister
Mitsuru Sakurai signalled on Thursday.

Sakurai told a news conference he hoped the government could
ask the public to help shoulder the burden of reconstruction
while a newspaper reported Tokyo was working on legislation that
would introduce additional taxes and special bonds to help
finance the rebuilding effort.

The Nikkei newspaper also said the bill could pave the way
for the Bank of Japan to directly buy government bonds,
something it can be allowed to do only under special
circumstances.

BOJ Governor Masaaki Shirakawa has repeatedly rejected such
an idea floated by some ruling party and opposition lawmakers,
saying such a move could unsettle the bond market and undermine
investor confidence in the yen. Government ministers have so far
denied considering such a plan.

The BOJ’s stance remains unchanged, a source familiar with
the central bank’s thinking said after the Nikkei report.

Japan faces its biggest reconstruction effort since the
post-World War Two period after the 9.0 magnitude earthquake and
a deadly tsunami hit Japan’s northeast on March 11, leaving more
than 27,500 dead or missing and triggering the world’s worst
nuclear crisis in 25 years. The government estimates the
material damage alone could top $300 billion, making it by far
the world’s costliest natural disaster.

Asked how the government will finance extra budgets, Sakurai
told a news conference: “When considering the magnitude (of the
damage), I don’t think it will be something like 10 trillion
yen,” suggesting the amount will be much higher.

“We also need to take into account the bond market,” Sakurai
said, suggesting that the government would prefer to limit new
borrowing to minimum, concerned about adding much to a debt pile
that already exceeds twice the size of the $5 trillion economy.

“If we can ask the public to broadly share the burden, we’d
like to do so,” he said.

Bond strategists said they were closely watching the debate
about the size and financing of extra budgets, but so far the
figures suggested by officials and floated in the media were
broadly in line with market expectation and did not warrant any
sharp reaction.

Analysts also said tax increases would be welcome news for
bond investors because they would allow to limit new borrowing
to levels that the market could easily digest.

“For example, if the government increases annual bond sale
to market by 5 trillion yen it may impact the market with some
degree,” said Chotaro Morita, head of Japan fixed income
strategy research at Barclays Capital. “But I don’t think the
10-year JGB yield ( JP10YTN=JBTC: Quote, Profile, Research) will jump, say, to 1.5
percent, which we have not see for a while, from the current
level of around 1.2 percent.”

In the immediate aftermath of the quake, officials were
offering assurances that no tax increases were planned to
finance that effort. But they later changed tack and Prime
Minister Naoto Kan told parliament earlier this week that he
would not rule out any source of funding, including a tax
increase or dropping a plan to cut corporate tax.

The extra disaster levy could come in the form of an
increase in sales, corporate or personal income taxes, Nikkei
said without citing any sources. The special bonds would serve
to finance rebuilding of roads, sewers and other infrastructure
in the worst-hit areas, it said.

The newspaper said on Wednesday, that the first emergency
budget worth about 2 trillion yen would be submitted to
parliament in April.

Analysts say the government will probably need two more
extra budgets, worth 10 trillion yen or more, with some putting
the total bill at as much as 20 trillion.

($1 = 82.875 Japanese Yen)

(Additional reporting by Leika Kihara; Editing by Tomasz
Janowski)

UPDATE 3-Japan extra budgets may top 10 trln yen, special tax eyed