Thu Dec 27, 2012 4:55am EST
* JGB yields rising in anticipation of new govt's policies
* LDP returns to power with promises of big fiscal spending
* PM Abe adviser wants to curb BOJ's independence
* Stimulus package, next FY budget immediate policy hurdles
By Tetsushi Kajimoto and Kaori Kaneko
TOKYO, Dec 27 (Reuters) - Japan's new finance minister on Thursday sought to quell concern about the country's weak finances, saying the government will not rely solely on debt to fund economic stimulus and will try to limit new debt issuance next fiscal year.
The government will compile spending requests for a stimulus package on Jan. 7 and finalise the proposal shortly thereafter as Prime Minister Shinzo Abe tries to quickly enact his agenda of increased public works spending to boost the economy.
The Bank of Japan's independence should be limited to ensure it buys enough government debt to spur inflation, an adviser to Abe told Reuters in an interview, echoing Abe's repeated calls for "unlimited" monetary easing to end almost 15 years of deflation.
Abe, sworn in as prime minister on Wednesday, led his Liberal Democratic Party to a landslide election victory this month with pledges to spend more and to get the central bank to purchase more debt, but this has fuelled worries the new government will delay reducing public debt.
"We will curb government bond issuance as much as possible to ensure confidence in JGBs," Finance Minister Taro Aso told reporters, referring to the budget for the next fiscal year beginning in April.
"We need to make public finances sustainable in the medium to long term."
Japan's previous government limited new bond issuance each fiscal year to 44 trillion yen ($514 billion) as a first step to prevent Japan's debt burden, the worst among major economies, from worsening further.
The new premier instructed the finance ministry to draft economic stimulus measures without worrying about adhering to this cap, Aso told reporters in a post-midnight news conference after the government was installed.
The government has not decided the size of the stimulus package, but Abe has repeatedly said he wants "big" spending to help narrow the output gap and ease deflation.
The government could tap reserves and frontload some public works spending in rural areas to limit new debt needed to fund a stimulus package.
It may be necessary to spend around 10 trillion yen, but the government needs to collect spending requests before it can decide, said Kozo Yamamoto, an LDP lawmaker who is working with other politicians to compile the party's stimulus package.
FISCAL SPENDING, MONETARY EASING, INVESTMENT
Abe's grand plan to boost the economy and end deflation is to combine fiscal spending and monetary easing with steps to encourage private-sector investment.
The BOJ should buy more long-dated government bonds and a wider variety of risk asset types, including foreign bonds, to achieve 2 to 3 percent inflation, said Koichi Hamada, a special economic adviser to Abe.
The government should revise the BOJ Law that guarantees the central bank's independence, to make it more accountable to the government, said Hamada, professor emeritus of economics at Yale University.
The Nikkei 225 stock average hit a 21-month high on Thursday and the yen hit a two-year low on expectations that the LDP's business-friendly stance and desire to weaken the yen would shake the world's third-largest economy out of its protracted funk.
"I believe expectations are high. We will work hard so that expectations will not remain just expectations, and that market expectations are realised," Economics Minister Akira Amari told reporters.
Yields on JGBs have also been rising, with the benchmark 10-year yield reaching the highest in more than two months. Should gains in yields continue, that could contribute to unease about Abe's fiscal policy.
Japan's public debt burden, more than twice the size of its $5 trillion economy, piled up during the LDP's more than half a century of almost unbroken rule in Japan.
Now that the LDP is back in power after three years in opposition, investors are looking for signs of how far the LDP will increase spending.
Japan's economy is in a mild recession due to a big slump in exports but is likely to escape next year, economists say.
Crafting bills for fiscal spending to ensure economic recovery is likely to take priority over revising the law to limit the BOJ's independence, but other political parties are also interested in changing the BOJ's mandate.
A small party called Your Party submitted on Thursday a bill to make the BOJ responsible for achieving stable employment and allow it to buy foreign debt, which could draw more attention in the regular session of parliament next year.
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