* Rebuilding may involve more bond issuance, tax hikes
* Political mess adds to concerns about spending (Adds finmin quotes, analyst comments, links)
By Tetsushi Kajimoto
TOKYO, May 2 (Reuters) - Japan’s parliament on Monday passed a $50 billion emergency budget for disaster relief after the March 11 earthquake and tsunami, a downpayment on what is set to be country’s biggest public works effort in six decades.
The overall cost of damage caused by the world’s costliest natural disaster is estimated at $300 billion and the 4 trillion yen emergency budget will be followed by more reconstruction spending packages.
Opposition parties backed the first round of spending to finance work such as clearing rubble in the disaster-stricken northeast and building temporary houses.
But reaching agreement on subsequent packages is likely to be much tougher as funding is expected to involve a mix of tax hikes as well as borrowing in the bond market, a strain for Japan which is already saddled with public debt twice the size of its $5 trillion economy.
“Our basic stance is to come up with revenue sources while broadly reviewing both revenue and spending plans,” Finance Minister Yoshihiko Noda told reporters.
Noda said he has not decided yet on specifics but that if the government were to issue special bonds to fund reconstruction, they should be managed separately from other debt and repaid using specific revenue sources.
The minister said he hoped to compile the second extra budget as soon as possible but did not give a specific timeframe.
The ruling Democratic Party needs opposition help because it lacks a majority in the upper house, which can block bills including one needed to secure about 40 percent of the revenue to fund the main budget for this financial year.
The first extra budget does not resort to fresh bond issuance. But unpopular Prime Minister Naoto Kan, who has come under fire for his handling of the crisis, has said Japan may have to issue fresh government bonds to fund further supplementary budgets.
Growing calls for Kan to resign, from within and outside his party, will make it hard for him to garner enough support to pass a second extra budget.
“If the political wrangling keeps the government from proceeding with a second extra budget, Kan might have no choice but to promise to call a general election in exchange for its passage,” said Hide Suezawa, chief strategist at SMBC Nikko Securities.
“Should the second extra budget be delayed to such an extent that the economy worsens further and companies are prompted to shift production overseas, this would further erode Japan’s ability to finance its debt and thus put upward pressure on long-term rates.”
Kan has said a sizable amount of funds would be needed for a second extra budget, which is expected to be compiled by autumn although in the absence of further details bond investors remain nervous.
Japan does not now face a Greece-style debt crisis since its public debt is held almost entirely by domestic investors. But players are keeping a close watch on Japan’s fiscal health.
The bulk of the 4.0153 trillion yen spending in the first extra budget — which includes 1.2 trillion yen of infrastructure spending — will be financed through spending cuts in existing programmes ranging from foreign aid to pension funds and the forgoing of increases in payout to families with children.
The magnitude 9.0 earthquake and tsunami that followed threw Japan into its deepest crisis since World War Two, leaving around 26,000 dead or missing, and destroying tens of thousands of homes.
The tsunami also crippled a nuclear power plant in Fukushima, 240 km (150 miles) north of Tokyo causing it to leak radiation and plant’s operator Tokyo Electric Power Co says it could take all year to bring the plant back under control. ($1 = 81.230 Japanese Yen) (Reporting by Tetsushi Kajimoto; Editing by Edwina Gibbs and Joseph Radford)