Japan cabinet approves last of key reconstruction bills

TOKYO Oct 28 (Reuters) - Japan's cabinet on Friday approved key bills to fund a massive rebuilding plan for the tsunami-ravaged northeast, advancing the last piece of a scheme that will give the economy a major boost, although a parliamentary brawl looms that could delay enactment.

The bills, one for tax and other steps to finance the 19 trillion yen ($250 billion) rebuilding effort and another on tax breaks and deregulation to support quake-hit local economies, needs to clear a divided parliament -- with support from a hostile opposition -- to take effect.

The funding bill has already been beset by haggling within the ruling Democratic Party.

Fiscal conservatives were keen to avoid adding heavily to Japan's bloated public debt, already twice the size of the economy, while others were averse to tax hikes even as Japan faces its biggest rebuilding effort since World War II.

The party decided to rely on a mix of spending cuts, asset sales, and hikes in taxes other than the unpopular consumption tax to fund the scheme.

Analysts had expected massive government spending on reconstruction would start boosting the economy in the third or final quarter of this year, but the slow progress has increased the fragile economy's vulnerability to a global slowdown and to yen strength, which have hit exporters particularly hard.

Following are key points of the legislation approved on Friday.

* Creates special zones in the disaster-hit region that give a five-year tax holiday to companies that open new operations and tax breaks to companies that hire people affected by the disaster.

* Relaxes regulations on use of farm land for alternative purposes, including relocating homes and factories in tsunami-hit areas.

* Increases income, corporate and tobacco taxes by a total of 9.2 trillion yen over a 10-year period, with the proceeds to be used to redeem reconstruction bonds.

* Provides non-tax revenue contributions of 7 trillion yen, in large part through spending cuts and sales of government-held shares of companies, including selling the government's 50 percent stake in Japan Tobacco possibly to zero and selling some of its shares in Inpex Corp , the nation's top oil and gas explorer, and other energy firms.

* The sale of shares in the country's massive postal savings system will also be considered.

The funding bill will likely be changed as the Democrats try to come to terms with the opposition on how long the tax hikes will remain in effect and whether to proceed with tobacco tax hikes, a ruling party lawmaker has said.

Seiji Maehara, the Democrats' policy chief, has proposed extending the redemption period for reconstruction bonds to 15 years to address opposition worries over the tax burden.

Parliament must also pass a 12.1 trillion yen supplementary budget recently approved by the cabinet, that earmarks 9.24 trillion yen for the reconstruction effort.

With parliamentary deliberations on the third extra budget only starting, there is no clarity on when the first special zones that are a key part of the reconstruction blueprint will come into force, a government official said.

The slow movement by the central government has delayed efforts by local governments to put together reconstruction plans, including where to relocate residents left homeless by the disaster and which industries to promote as engines of revitalisation.