CORRECTED - CORRECTED-WRAPUP 2-Japan govt sets $16.5 bln inflation relief sp

(Corrects paragraph 13 to ...1.8 trillion ..., not 2 trillion).

(For more stories on Japan's economy click [ID:nECONJP])

* Japan to spend $16.5 bln to ease pain from high prices

* Analysts see little economic effect or political boost

* Temporary tax cuts planned but no details

* Government says no need to issue more bonds

By Yuzo Saeki

TOKYO, Aug 29 (Reuters) - Japan unveiled plans on Friday to spend about $16.5 billion extra this year to ease the pain to businesses and consumers from rising oil and food prices, but its package looked unlikely to help avert recession or restore the government's sagging ratings.

The total economic package was worth about $107 billion but much of that included non-cash measures such as loan guarantees for small businesses, which analysts warned would do little to ease public anxiety about a bleak economic outlook.

"Global rises in oil and food prices are having a significant impact on the Japanese public," Prime Minister Yasuo Fukuda told cabinet ministers and others from the ruling coalition who signed off on the measures.

"It is important that we support the people and small firms and strengthen the Japanese economy."

Many economists say Japan is either already in recession or about to tip into one. Job offers are at a nearly four-year low and inflation at a decade-high 2.4 percent. Industrial output rebounded in July but economists said that was probably a temporary blip. [ID:nT63497]

Analysts questioned the impact of the 11.7 trillion yen package in both economic and political terms, saying it would do little to ease doubts about Prime Minister Yasuo Fukuda's leadership ahead of an election that must be held by late 2009.

"Talk of replacing Fukuda will resume and the need for more decisive leadership will become more urgent," said Jesper Koll, president of investment advisory firm Tantallon Research Japan.

At the insistence of the smaller party in the ruling coalition, the New Komeito, the package included a promise of temporary tax cuts, but gave no details.

Faced with huge public debt, Fukuda has sought to keep new government spending to a minimum despite pressure within the ruling bloc to revert to past pork-barrel practices.

He said the government did not plan to issue extra government bonds to finance the package.

"We will maintain our basic stance that we aim to achieve growth and strengthen the economy through reforms," Fukuda said.

Finance Minister Bunmei Ibuki told reporters the government might need to draft a second extra budget for the year to March 2009, depending on the size of the temporary income tax cuts.

DEBT MOUNTAIN

At around 1.8 trillion yen in new spending, the package is smaller than past programmes that aimed to stimulate the economy through pork-barrel spending, amounting to 0.4 percent of GDP.

In comparison, the United States produced a $150 billion economic stimulus package this year to help its economy cope in the aftermath of the subprime mortgage debacle. The U.S. package, around 1.3 percent of GDP, included tax rebates of up to $600 per person.

Analysts said Japan's effort seemed aimed more at electioneering than the economy, now suffering from falling demand and rising prices.

"It's hard to expect any economic impact, and in the process of compiling the package we saw a growing division between the cabinet and ruling parties as well as between the LDP and the New Komeito party," said Kyohei Morita, chief economist at Barclays Capital Japan. "That will likely prompt voters to feel less confidence in their ability to govern."

A row over temporary income tax cuts had complicated efforts to craft the package, with many in Fukuda's Liberal Democratic Party doubtful these would cheer consumers much.

But the New Komeito demanded the tax relief, which would be especially welcome to its lower income supporters.

The New Komeito helps make up the ruling bloc's two-thirds majority in parliament's lower house, which allows it to override vetoes by an opposition-controlled upper chamber.

Its cooperation with the LDP in the election, which may come well ahead of the September 2009 deadline, is also vital.

Funding for the package was a source of contention, with the New Komeito and some in the LDP arguing relief for consumers and firms should take priority over fixing fragile public finances.

However, cabinet ministers did not want extra government bonds to be issued because of Japan's huge public debt, a legacy of past stimulus efforts and equal to about one-and-a-half times GDP.

A voter-pleasing package might have encouraged Fukuda to call an early snap poll for parliament's lower house to try to gain a mandate to break a political deadlock in which opposition parties control the upper house.

But going to the polls would be a big risk for the ruling bloc, since it is almost certain to lose its two-thirds majority in the more powerful lower house. ($1=109.09 Yen) (Additional reporting by Leika Kihara, Tetsushi Kajimoto and Hideyuki Sano; Writing by Yoko Nishikawa and Linda Sieg; Editing by Rodney Joyce)