UPDATE 1-Japan finmin seeks to reassure markets on bond issuance
* JGB yields rising in anticipation of new govt's policies
* LDP returns to power with promises of big fiscal spending
* Stimulus package, next FY budget immediate policy hurdles
By Tetsushi Kajimoto and Kiyoshi Takenaka
TOKYO, Dec 27 (Reuters) - Japan's new finance minister on Thursday sought to quell concern about the country's weak finances, saying the government will not rely solely on debt to fund economic stimulus and will try to limit new debt issuance next fiscal year.
The government will compile spending requests for a stimulus package on Jan. 7 and finalise the proposal shortly thereafter as Prime Minister Shinzo Abe tries to quickly enact his agenda of increased public works spending to boost the economy.
Abe, who was sworn in as prime minister on Wednesday, led his Liberal Democratic Party to a landslide election victory this month with pledges for an expansionary fiscal policy, but this has fuelled worries the new government will delay reducing public debt.
"We will curb government bond issuance as much as possible to ensure confidence in JGBs," Finance Minister Taro Aso told reporters, referring to the budget for the next fiscal year beginning in April.
"We need to make public finances sustainable in the medium to long term."
Japan's previous government limited new bond issuance each fiscal year to 44 trillion yen ($514 billion) as a first step to prevent Japan's debt burden, the worst among major economies, from worsening further.
The new premier instructed the finance ministry to draft economic stimulus without worrying about adhering to this cap, Aso told reporters in a post-midnight news conference after the government was installed.
The government has not decided the size of the stimulus package, but Abe has repeatedly said he wants "big" spending to help narrow the output gap and ease deflation.
The Nikkei 225 stock average hit a 21-month high on Thursday and the yen hit a two-year low on expectations that the LDP's business-friendly stance and desire to weaken the yen would shake the world's third-largest economy out of its protracted funk.
"I believe expectations are high. We will work hard so that expectations will not remain just expectations, and that market expectations are realised," Economics Minister Akira Amari told reporters.
Yields on JGBs have also been rising, with the benchmark 10-year yield reaching the highest in more than two months. Should gains in yields continue, that could contribute to unease about Abe's fiscal policy.
Japan's economy is in a mild recession due to a big slump in exports but is likely to resume growing next year, economists say.
Abe's government wants stimulus spending large enough to ensure a strong recovery, but it will be expected to show willingness to curb spending by the time it compiles its budget for next fiscal year.
Japan's public debt burden, more than twice the size of its $5 trillion economy, piled up during the LDP's more than half a century of almost unbroken rule in Japan.
Now that the LDP is back in power after three years in the opposition, investors are looking for signs of how far the LDP will increase spending.