By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's government may be able to fund its first emergency budget with spending cuts rather than more borrowing if the package is limited and targets immediate relief after this month's deadly earthquake and tsunami, government sources said.
Such spending cuts might also help win the opposition's support for bills accompanying the budget for the coming fiscal year, particularly one needed to issue new bonds to finance the regular budget and bigger emergency packages later on.
The government, in its first official estimate, said on Wednesday the material damage from the March 11 quake and tsunami could exceed $300 billion, making it the world's costliest natural disaster.
Ruling Democratic Party officials have said two or more extra budgets will be necessary to fund Japan's biggest reconstruction effort since the post-World War Two period, with the first, relatively small package possible in April or May.
"If it's around 1 trillion yen ($12.4 billion), we could do without issuing more bonds," said one government official, who spoke on condition of anonymity because he was not authorized to speak to the press.
Some analysts and ruling party lawmakers say the total disaster-related spending may reach $100 billion and the official said further budgets will likely require new borrowing.
He said, however, it was too early to produce specific estimates because individual ministries were still gathering information on the destruction and financial needs.
The Democrats need opposition backing to pass the key bill on deficit financing needed to fund both the regular and future additional budgets.
Before the disaster struck, the opposition was blocking those bills to force the deeply unpopular Prime Minister Naoto Kan to resign or call a snap election. But since then it has signaled it would help end the deadlock in return for up to 3.6 trillion yen in cuts in Democrats' spending plans based on their 2009 campaign pledges.
Government officials said, however, it was still not clear if the Democrats can reach an internal consensus on spending cuts as many lawmakers fear they could alienate voters before local elections in April.
Katsuya Okada, the secretary general of the Democrats, underlined the concern.
"It may be hard to find other revenue sources (other than government bonds) to finance the first extra budget which will come in April-May," he told reporters. "I'm aware of the need to reallocate the spending that is not urgent, but I wonder if that can be done just when the new fiscal year starts in April."
Okada said the government will first tap 1.1 trillion yen of reserve funds earmarked in the 2011/12 budget for quake relief before deciding on the exact timing and size of the extra budget.
He also signaled difficulty in meeting the opposition demand for withdrawing its key spending plans including payouts to families with children and subsidies for farmers, calling instead for the need to review other areas of spending.
Most economists and policymakers say the Japanese government should have little trouble raising extra funds given the current market situation, but some analysts say there is a risk that an increased supply of government bonds could push up borrowing costs.
The government official said that even though the government has yet to decide how to finance the relief and reconstruction effort, issuing construction bonds rather than deficit bonds would be an attractive option because they do not require any additional legislation.
($1 = 80.930 Japanese Yen)
(Editing by Chizu Nomiyama)