UPDATE 3-Japan vows caution on new debt; may review corp tax cut

* First emergency budget by end-April -finmin

* Finmin Noda says must be careful with new borrowing

* Econ. minister- may reconsider corporate tax cut plan

* Finmin- govt, opposition to cooperate on emergency budget

* Noda rejects idea of using forex reserves for funding

(Updates with more BOJ, Noda on yen, currency reserves)

By Tetsushi Kajimoto and Shinji Kitamura

TOKYO, March 25 (Reuters) – Japan needs to be careful about
taking on new debt to fund relief and reconstruction after this
month’s deadly earthquake and tsunami, and may review its plan
to cut the corporate tax, top economic officials said on Friday.

Finance Minister Yoshihiko Noda said the government aimed to
get its first emergency budget ready by the end of April and
suggested it would not rely heavily on extra borrowing to fund
it, reflecting worries over Japan’s massive public debt.

The material damage from the magnitude 9.0 earthquake that
unleashed a deadly tsunami on Japan’s northeast on March 11
could exceed $300 billion, the government estimated this

That makes it the world’s costliest disaster even without
the further impact of power cuts and a drawn out struggle to
contain the damage at a stricken nuclear plant 240 km (150
miles) north of Tokyo. More than 27,000 people are dead or

“We cannot easily increase government bond issuance,” Noda
told reporters, adding that the emergency budget would be
compiled in cooperation with the opposition, whose help is
needed to pass enabling bills in a divided parliament.

“Even if we craft the extra budget, it would not mean a
thing if it fails to pass the parliament,” he said.

Speaking separately, Economics Minister Kaoru Yosano said
that the government might need to reconsider its plan to cut the
corporate tax rate by 5 percentage points from the fiscal year
starting in April, given the reconstruction needs.

The effective tax rate for Japanese companies is higher than
in most major economies at around 40 percent. The Finance
Ministry has estimated the cut would reduce tax revenue by some
430 billion yen ($5.3 billion).

“If the corporate tax cut serves to encourage employment,
investment, research and development, that would be a step in
the right direction,” Yosano said. “But given the current
situation, we need to rethink whether the corporate tax (cut)
based on such thinking is something the whole society demands.”


Economists polled by Reuters this week forecast Japan’s
biggest rebuilding effort since the post-World War Two period
could cost the government as much as $250 billion, with the
first emergency budget seen at around $62

Noda, who earlier rejected calls for a special relief tax,
on Friday dismissed suggestions that Japan could use some of its
$1 trillion in foreign reserves for funding, underscoring that
fiscal savings and borrowing would have to do the job.

“The foreign exchange account is to be used for currency
intervention aimed at stabilising the foreign exchange markets
and for management of foreign currencies for this purpose,” he
told parliament.

“I know the quake reconstruction will require a lot of money
but we basically cannot pay for it through the foreign exchange

With public debt already twice the size of its $5 trillion
economy — the highest among industrialised nations — Tokyo is
wary of adding another big chunk to that debt pile.

Bank of Japan Governor Masaaki Shirakawa said the central
bank would do its part to help the government, continuing to
pump trillions of yen into the banking system and buying
government bonds in the market.

“It is important to create an environment where government
bonds are absorbed smoothly by the markets,” Shirakawa told a
parliamentary committee. “To this end, we have supplied ample
funds to markets, including massive government bond purchases,
and have eased policy.”

“Our stance of supplying ample money to markets will remain
unchanged in the future.”

In a sign that financial markets were recovering from the
initial shock of the disaster, Tokyo stocks rose on
Friday, largely driven by foreign buying , while the yen
held near 81 to the dollar, well below last week’s all-time peak
of 76.25 that prompted a rare joint Group of Seven intervention.

Noda, keen to prevent a surging yen from hobbling the
post-disaster recovery, said Tokyo would keep cooperating with
G7 on currencies — a hint that more coordinated action was

Government sources told Reuters this week that spending cuts
could cover much of the first emergency budget.

Cutting the corporate tax, however, was seen as an important
pro-business gesture by the Democratic Party, which in 2009
swept to power promising to ramp up support for families.

Now, the Liberal Democratic Party — which ruled Japan
almost without interruption for half a century — and other
opposition parties want the government to ditch some key
spending pledges to free up funds for reconstruction.

The Democrats, who need opposition votes to pass a bill
allowing it to sell more bonds, have signalled readiness to drop
some pledges, including extra funds for child support.

But government officials say it will be difficult to
roll-back all of the pledges worth around 3.6 trillion yen,
given ruling party lawmakers’ concerns that this could alienate
voters ahead of local elections due next month.
($1 = 80.985 Japanese Yen)

(Additional reporting by Leika Kihara and Rie Ishiguro; Writing
by Tomasz Janowski; Editing by Nathan Layne & Kim Coghill)

UPDATE 3-Japan vows caution on new debt; may review corp tax cut