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Japan cabinet approves $25 bln extra budget for disaster relief

MYT 9:45:57 AM

TOKYO (Reuters) - Japan's government approved a $25 billion extra budget on Tuesday for disaster relief after the March 11 earthquake that will not require new bond issuance, though bigger spending later this year is likely to strain stretched public finances.

A man stands at an area that was devastated by the March 11 earthquake and tsunami, in Otsuchi, Iwate prefecture April 17, 2011. (REUTERS/Toru Hanai/Files)

The extra budget follows a 4 trillion yen ($50 billion) emergency budget passed by parliament in May to cope with the world's costliest natural disaster, caused by the magnitude 9.0 earthquake and tsunami, and the subsequent nuclear crisis. The supplementary budget will be sent to parliament in mid-July.

Prime Minister Naoto Kan had initially sought bigger spending for the second extra budget, but the unpopular premier scaled back the spending plan in the face of mounting calls for his resignation both within and outside of his ruling Democratic Party.

Kan, under fire for his handling of the radiation crisis at the Fukushima nuclear plant, cited the passage of the second extra budget as one of the conditions for keeping his promise to resign. He has made the timing of his exit ambiguous.

The supplementary budget features compensation to those affected by the nuclear meltdown in Fukushima and measures to help the indebted individuals and businesses in the quake-hit areas secure new loans.

The extra budget will be funded entirely with leftover funds from last fiscal year's budget, with 545.5 billion yen set aside for local governments in the disaster-hit areas.

The government is keen to fund as much of emergency spending as possible without new borrowing as it is saddled with a public debt that is already twice the size of the $5 trillion economy.

It used fiscal reserves to finance the first emergency budget while higher-than-planned tax revenues in the 2010/2011 fiscal year allowed it to finance the 2 trillion yen instalment without issuing more bonds.

In order to use the leftover funds, the government must pass a special bill in parliament, where the opposition controls the upper house and has been piling pressure on Kan to quit by blocking bills including one enabling deficit-bond issuance.

Opposition parties have signalled that they would support the emergency spending, however.

The government will allocate 77.4 billion yen in the extra budget to support loans to borrowers from the affected areas and 300 billion yen for families whose homes were destroyed by the disaster.

The budget also includes 275.4 billion yen related to compensation to those affected by the nuclear meltdown at the Fukushima Daiichi plant, operated by Tokyo Electric Power Co.

This includes 7 billion yen set aside for a planned organisation to handle compensation to victims once a relevant bill is passed by parliament.

The government set up a framework in the extra budget to issue 2 trillion yen in special-purpose bonds to help finance the planned organisation, and it earmarked 20 billion yen in the extra budget for interest payments. It also created government guarantees worth 2 trillion yen for the new organisation.

The second extra budget also includes 800 billion yen for contingency funds related to reconstruction.

Investors are bracing for bigger reconstruction spending later this year, expected to top 10 trillion yen and involve reconstruction bond issuance and tax hikes to repay it.

($1 = 80.770 Japanese Yen)

(Editing by Tomasz Janowski)

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