UPDATE 1-Japan ruling party wants tax hikes for quake rebuilding -paper

Thu Jun 16, 2011 3:16am EDT

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By Tetsushi Kajimoto and Chisa Fujioka

TOKYO, June 16 (Reuters) - Japan's ruling party aims to raise corporate and income taxes to repay new government bonds for funding massive reconstruction needed after the March 11 earthquake and tsunami, a newspaper reported on Thursday.

The ruling Democratic Party (DPJ) is considering raising both taxes by around 10 percent, generating 1-2 trillion yen ($12-24 billion) in annual revenue to pay back borrowing for reconstruction over a decade, the Mainichi newspaper reported without citing a source.

The party will not use revenue from the sales tax to cover the reconstruction bonds, the paper said, as it wants to use that tax for growing social security costs and is already considering doubling it to 10 percent.

The government is trying to set the direction for Japan's biggest rebuilding effort since the post World War Two period, estimated to cost over $300 billion, after the March disaster devastated the nation's northeast coast.

Many lawmakers are wary of tax hikes, however, worrying they could alienate voters. Mounting calls for unpopular Prime Minister Naoto Kan to step down also make it unclear if the DPJ-led government could push tax hikes through parliament.

A nonpartisan group of 211 lawmakers said on Thursday they oppose tax hikes for reconstruction. Instead they urged the Bank of Japan to buy "reconstruction bonds" by boosting outright purchases of long-term government bonds from the market beyond the current 21.6 trillion yen ($267 billion).

"In principle we are against all kinds of tax hikes in the name of reconstruction. We can carry out reconstruction without resorting to a tax hike," DPJ lawmaker Takeshi Miyazaki told reporters.

The BOJ has been resisting calls for it to boost purchases of government bonds out of concerns that such a move, if perceived by financial markets as monetising debt, could cause a spike in bond yields.

Some ruling party lawmakers had earlier this year sought to have BOJ directly underwrite government debt by buying reconstruction bonds, but the idea was quickly dismissed by cabinet ministers.

Kan ordered cabinet ministers this week to compile an additional budget to help pay for reconstruction, to be submitted to parliament next month. The legislature approved a first emergency budget in May involving 4 trillion yen in spending.

Finance Minister Yoshihiko Noda has said the government will avoid issuing extra bonds to finance a second extra budget.

But further spending will likely require bond issuance at a time when investors are nervous about Japan's huge debt, already twice the size of the $5 trillion economy, the worst among industrial countries.

The ruling party is looking for spending of around 2 trillion yen in the second extra budget for rebuilding, media said on Wednesday. ($1 = 81.035 Japanese Yen) (Editing by Michael Watson)

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