Japan must fund rebuilding bonds by tax hike

TOKYO: Japan must raise taxes to repay new government bonds that will be needed to pay for massive reconstruction after last month's earthquake and tsunami, a senior ruling party official said on Sunday.

The idea, however, may be resisted by some members of the ruling Democratic Party of Japan (DPJ) and by the party's tiny coalition ally, who fear that higher taxes will be unpopular with voters and hurt the economy.

The government hopes to avoid having to issue new bonds to fund an initial emergency budget, expected to be worth about 4 trillion yen ($48 billion), and likely to be approved by parliament by the end of this month or in May.

But bond issuance is likely for subsequent extra budgets, and markets are concerned that post-quake rebuilding may delay Japan's efforts to rein in its huge debt, already twice the size of the $5 trillion economy, the worst among industrialised nations.

Markets need to be assured that any additional bonds that are issued will be repaid with higher taxes, said DPJ Secretary-General Katsuya Okada.

"I'm not saying that taxes need to be raised right away. But we need to guarantee that bonds for reconstruction will be paid for by a future tax increase," Okada, the party's No.2, told a programme on public broadcaster NHK.

"There's already talk of whether we should raise the consumption tax, income tax or others ... Would the market (bond prices) hold up if we issue 10-15 trillion yen worth of bonds with no plan?"

The cost of the material damage alone from the March 11 earthquake and tsunami has been estimated at $300 billion, making it the world's most costly natural disaster.

But the No.2 of the DPJ's coalition ally, the People's New Party, told the same broadcast that he was against raising taxes. Wrangling is also expected with opposition parties, who have a majority in the upper house of parliament and can block bills.

The secretary-general of the main opposition Liberal Democratic Party told the show he was against raising the 5 percent consumption tax to fund reconstruction, saying the tax should be used to fund growing social security costs.