UPDATE 2-Japan to add 1 trln yen to stimulus plan - Nikkei

(For more stories on the Japanese economy, click [ID:nECONJP]) (Changes dateline, adds more background)

TOKYO Dec 2 (Reuters) - Japan's Ministry of Finance will set aside an additional 1 trillion yen ($11.5 billion) or more to fund economic stimulus measures in the fiscal year to March, the Nikkei business daily reported on Wednesday.

The size of an economic stimulus package the government is compiling is expected to be about 4 trillion yen in actual spending, compared with its earlier projection of about 2.7 trillion yen ($31 billion), Nikkei said.

The government is expected to prepare an economic stimulus package this week to shore up a fragile economy as its recovery is threatened by the yen's appreciation.

In addition to the 4 trillion yen in spending, the government may set aside 2.5 trillion yen to make up for shortfalls in tax revenue for local governments, the daily also said.

"The outcome is clear. The government will need to increase bond issuance," said Yuichi Kodama, economist at Meiji Yasuda Life Insurance.

"The market already has factored in additional government bond issuance and expectations of persistent deflation, and the Bank of Japan's additional monetary easing so far is capping bond yield rises. But the market will likely start reacting again at some point," he said.

The government has been seeking not to issue extra debt to finance its stimulus package, essentially by reallocating 2.7 trillion yen spending that the Democratic Party-led government had frozen in a budget compiled by the previous government.

For financing the additional spending, the government will tap unspent interest payments on government bonds as long-term interest rates have stayed below the ministry's initial projection, the Nikkei said.

It is also considering dipping into the 350 billion yen in reserves for disaster relief and other emergency situations, the paper said.

Finance Minister Hirohisa Fujii has said the government won't issue extra bonds except for the need to cover a tax revenue shortfall. [ID:nTKU105708]

Japan's tax revenue is expected to fall to below 38 trillion yen from the initial estimate of 46 trillion yen. ($1=86.70 Yen) (Reporting by Rie Ishiguro) ((rie.ishiguro@thomsonreuters.com; +81 3 6441 1885; Reuters Messaging: rie.ishiguro.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))