By Rie Ishiguro and Kaori Kaneko
TOKYO (Reuters) - Japan's government may need to spend over 10 trillion yen ($120 billion) in emergency budgets for post-quake disaster relief and reconstruction, with part of them possibly covered by new taxes, deputy finance minister Mitsuru Sakurai signaled on Thursday.
Sakurai told a news conference he hoped the government could ask the public to help shoulder the burden of reconstruction while a newspaper reported Tokyo was working on legislation that would introduce additional taxes and special bonds to help finance the rebuilding effort.
The Nikkei newspaper also said the bill could pave the way for the Bank of Japan to directly buy government bonds, something it can be allowed to do only under special circumstances.
BOJ Governor Masaaki Shirakawa has repeatedly rejected such an idea floated by some ruling party and opposition lawmakers, saying such a move could unsettle the bond market and undermine investor confidence in the yen. Government ministers have so far denied considering such a plan.
The BOJ's stance remains unchanged, a source familiar with the central bank's thinking said after the Nikkei report.
Japan faces its biggest reconstruction effort since the post-World War Two period after the 9.0 magnitude earthquake and a deadly tsunami hit Japan's northeast on March 11, leaving more than 27,500 dead or missing and triggering the world's worst nuclear crisis in 25 years. The government estimates the material damage alone could top $300 billion, making it by far the world's costliest natural disaster.
Asked how the government will finance extra budgets, Sakurai told a news conference: "When considering the magnitude (of the damage), I don't think it will be something like 10 trillion yen," suggesting the amount will be much higher.
"We also need to take into account the bond market," Sakurai said, suggesting that the government would prefer to limit new borrowing to minimum, concerned about adding much to a debt pile that already exceeds twice the size of the $5 trillion economy.
"If we can ask the public to broadly share the burden, we'd like to do so," he said.
Bond strategists said they were closely watching the debate about the size and financing of extra budgets, but so far the figures suggested by officials and floated in the media were broadly in line with market expectation and did not warrant any sharp reaction.
Analysts also said tax increases would be welcome news for bond investors because they would allow to limit new borrowing to levels that the market could easily digest.
"For example, if the government increases annual bond sale to market by 5 trillion yen it may impact the market with some degree," said Chotaro Morita, head of Japan fixed income strategy research at Barclays Capital. "But I don't think the 10-year JGB yield will jump, say, to 1.5 percent, which we have not see for a while, from the current level of around 1.2 percent."
In the immediate aftermath of the quake, officials were offering assurances that no tax increases were planned to finance that effort. But they later changed tack and Prime Minister Naoto Kan told parliament earlier this week that he would not rule out any source of funding, including a tax increase or dropping a plan to cut corporate tax.
The extra disaster levy could come in the form of an increase in sales, corporate or personal income taxes, Nikkei said without citing any sources. The special bonds would serve to finance rebuilding of roads, sewers and other infrastructure in the worst-hit areas, it said.
The newspaper said on Wednesday, that the first emergency budget worth about 2 trillion yen would be submitted to parliament in April.
Analysts say the government will probably need two more extra budgets, worth 10 trillion yen or more, with some putting the total bill at as much as 20 trillion.
($1 = 82.875 Japanese Yen)
(Additional reporting by Leika Kihara; Editing by Tomasz Janowski)