UPDATE 2-Japan 2012/13 budget requests hit record 98.4 trln yen

(Adds quotes, more details)

* Reconstruction spending requests amount to Y3.5 trln -MOF

* Govt to trim requests when compiling budget in December

* Tax hikes needed for fiscal health-analyst

* Ruling, opposition talks to start on this year's extra budget

By Tetsushi Kajimoto and Rie Ishiguro

TOKYO, Oct 5 (Reuters) - Japan's government ministries have requested a record 98.4 trillion yen ($1.28 trillion) for the fiscal 2012/13 budget from next April, the Ministry of Finance said on Wednesday, boosted by demand for spending on reconstruction from the March earthquake and tsunami.

The budget requests hit a record for the third straight year as Japan tries to carry out a balancing act to rein in public debt about twice the size of its $5 trillion economy without choking off recovery from the slump caused by the March 11 disaster.

Of the total, reconstruction-related requests comprised 3.5 trillion yen as the government allowed ministries to seek an unlimited amount for rebuilding in areas devastated by the magnitude 9.0 quake and deadly tsunami, which triggered the world's worst nuclear crisis since Chernobyl in 1986.

The government faces the hard task of trimming the requests by December, when it compiles its initial 2012/13 budget, to keep its self-imposed caps on non-debt servicing spending at 71 trillion yen and new debt issuance at 44 trillion yen, both the same as in the current year.

"We will stick to the spending cap and make sure new bond issuance does not exceed the ceiling," Vice Finance Minister Yukihisa Fujita told reporters.

The spending and borrowing targets, however, exclude reconstruction-related costs which the government plans to eventually finance with tax increases.

But the ruling Democratic Party is still far from reaching a consensus on the tax hike proposals the government unveiled last month.

"Without tax hikes, Japan wouldn't be able to halve its primary budget deficit by 2015 as earlier pledged and the significance of Prime Minister (Yoshihiko) Noda being in power would be lost," Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said.

"The battle has only begun in the ruling party over proposed tax hikes."

Noda, a fiscal hawk who became the prime minister a month earlier, has said reforming the tattered public finances is one of his top policy priorities just as a debt crisis hits Europe.

The government's budget targets also may prove hard to achieve if a power supply shortages in the wake of the March 11 disaster, a rising yen and slowing global demand erode corporate earnings and tax revenues as the year progresses.

Of the overall requests, those excluding debt-servicing costs came to 75.8 trillion yen, while debt-servicing costs -- interest payments and redemptions on the debt -- came to 22.6 trillion yen, up 1 trillion yen due to bulging public debt.

The government plans to spend 19 trillion yen over the next five years to pay for Japan's biggest rebuilding effort since the aftermath of World War Two, of which 6 trillion yen has already been budgeted.

The government aims to submit to parliament this month another extra budget worth 12 trillion yen, of which 9.1 trillion yen is dedicated to reconstruction.

Opposition parties that control parliament's upper house have agreed to start talks with the ruling party on the extra budget from Thursday but whether they would agree to enact it in a divided parliament is hardly a done deal.

Japan's public debt has long been financed domestically from its massive pool of savings, helping keep bond yields well below equivalent yields in the United States.

Some Japanese policymakers and investors are wary that speculators who are attacking European financial markets over the continent's sovereign debt crisis could soon turn their attention to Japan, which could be a further drag on economic recovery.

The budget requests were made by Sept. 30, one month later than usual due to a delay caused by the disaster, which has sent the government scrambling to compile the extra budgets.

($1 = 76.710 Japanese Yen) (Reporting by Tetsushi Kajimoto and Rie Ishiguro; Editing by Joseph Radford)