May 17, 2010 / 7:37 AM / 9 years ago

UPDATE 1-Japan Kan: debt cap won't lead to spending cuts

* Japan’s debt burden in focus after Greek debt woes

* Spending cuts likely necessary to reduce Japan’s debts

* Japan’s debt-GDP ratio worse than Greece’s

(Adds details, quotes, graphic)

By Stanley White

TOKYO, May 17 (Reuters) - Japan’s finance minister said on Monday a plan to cap new government bond issuance doesn’t mean the government will cut spending, casting doubt on his resolve to rein in the country’s debt.

Japan’s ruling Democratic Party will aim to keep new government debt issuance next fiscal year below this year’s record 44.3 trillion yen ($480 billion) in its campaign platform, a senior lawmaker said on Friday. The ruling party panel also called for an overhaul of Japan’s tax system, an expression politicians typically use to mean tax hikes.

Greece’s debt woes have turned the spotlight on Japan’s debt burden, which is the largest among industrialised economies at nearly twice the size of its economy. Japanese politicians have been sending mixed messages on how far they will change fiscal policy, which could undermine confidence in Japan’s public finances.

“Limiting bond issuance does not mean I am saying we will shrink fiscal spending,” Finance Minister Naoto Kan told lawmakers in the country’s parliament.

"Japan is in deflation, so we need a certain amount of fiscal spending to keep money circulating." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on Japan debt link.reuters.com/qeg59h More stories on Japan's economy [ID:nECONJP] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The government plans next month to release a fiscal discipline target and a framework for fiscal spending over the next three years.

Credit ratings agencies have threatened to downgrade Japan if it doesn’t show a serious commitment to steadily reducing its debt over time.

“The impression that I’m getting is that there is no credible plan to improve Japan’s public finances,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd in Hong Kong.

“I think they need to cut spending, but they need to do it gradually. They should also work on the revenue side.”

Fear that investor distrust of Greece's public finances will spread to Spain, Portugal or other European countries has sent the euro EUR= to a four-year low against the dollar and roiled global stock markets.

Japan’s government has had difficulty sending a consistent message that it will spend less, partly because some Democrats worry this could alienate voters when support for Prime Minister Yukio Hatoyama’s cabinet is already hovering near 20 percent. (Editing by Joseph Radford)

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